Navigating ESG in Polish commercial real estate market

Filip Sarzyński, Partner in Brookfield Partners, sheds light on the profound impact of Environmental, Social Responsibility, and Corporate Governance (ESG) standards on the commercial real estate landscape in Poland. From the impending influence on operating costs to the changing dynamics in tenant preferences, the expert provides a comprehensive overview of the challenges and opportunities arising from the growing emphasis on ESG in the business realm.

FOCUS ON Business: What is ESG, and how can the implementation of ESG standards impact the commercial real estate industry in Poland?

Filip Sarzyński, Brookfield Partners: ESG, or Environmental, Social Responsibility and Corporate Governance, is a set of factors that form the basis of non-financial assessments of companies, countries and other organizations. It is an important part of the global economy because it promotes greener and more pro-social actions by companies. The pursuit of more responsible and sustainable development has now become an integral part of business operations around the world. Companies are seeking to implement practices based on ESG standards not only because of pressure from regulators, investors and lenders, but also because of growing pressure from employees and informed consumers.

Also in the real estate industry, the implementation of ESG standards is having a significant impact. Commercial real estate, such as offices, can be particularly vulnerable to these changes. For example, buildings that comply with environmental, energy efficiency and other green issues may attract more environmentally conscious tenants. It is also worth noting that investors are increasingly taking ESG aspects into account when making investment decisions.

Taking all these factors into account, I am surprised by the results of the Polish ESG Association's survey, which shows that more than 53% of companies have never heard of the ESG concept, and only 14% are very familiar with it. I think that, unfortunately, there is still a long way to go for Polish entrepreneurs to consciously implement ESG standards in their companies.

In what ways can ESG standards influence tenants or occupiers of commercial real estate properties like offices?

Sooner or later, ESG reporting obligations will affect many Polish companies. At the beginning of 2024, the CSRD, Corporate Sustainability Reporting Directive, is due to come into force, requiring the reporting of detailed ESG information and results. Initially, it will cover large public interest entities. In time, all large, small and medium-sized listed companies will also be subject to this obligation. This will also apply to landlords and tenants of commercial real estate.

I believe that ESG standards will have a significant impact on these tenants because ESG affects, among other things, the operating costs of real estate. Buildings with higher ESG standards, which emit fewer greenhouse gases and use energy more efficiently, tend to be more energy efficient. This translates into lower operating costs for both owners and tenants. For tenants, this means lower energy and maintenance bills, which in turn lowers the overall cost of operating offices or other properties. Recent market re search shows that for as many as 32% of tenants, the lack of energy-reducing features is an element that crosses out a building. Which, in my opinion, is understandable, given current electricity prices.

Also in these days, companies are also increasingly looking at their reputation as an employer that is committed to social and environmental issues. An interesting trend is that ESG-certified offices can attract qualified staff who are looking for employers committed to these important aspects. Therefore, ESG standards can be an important deciding factor for companies that want to attract and retain the best employees.

Are companies giving increasing importance to ESG standards when searching for office spaces? How do these standards factor into their decision- making processes?

Yes, companies are becoming more aware of the advantages of implementing ESG standards every year. This is a result of growing environmental and social awareness and changing expectations from customers, business partners and investors. Entrepreneurs are also increasingly willing to use consulting firms that seek to support companies in achieving ESG strategies. We are also seeing more and more companies with climate goals and individual strategies that include rental space, so it is crucial for them to have access to buildings that meet ESG criteria.

We see that companies are looking to lease offices in buildings that are more energy efficient, more efficient and more environmentally friendly. Our clients are looking for office buildings that meet ESG standards, and this fact is often a key factor in choosing an office location. This trend is especially evident among the largest international corporations, which give very high priority to ESG standards when looking for a suitable location for their headquarters.

In my opinion, a real revolution is coming soon for companies. So it's important to start transforming your business model as soon as possible.

Could you explain the steps and strategies for implementing ESG standards in the context of office space rental, and what benefits can companies derive from doing so?

Many clients already have a list of prepared ESG strategic goals that they need to meet. Unfortunately, however, this does not mean that it will be easy to find the right building that meets the selected criteria.

At the moment, buildings have a growing number of certifications, the most popular of which are BREEAM, LEED and WELL. These certifications are used to evaluate buildings based on clearly defined technical parameters. Applying for them and bringing a building up to current standards is time-consuming and requires a lot of work and investor money. However, it should be remembered that despite everything, it is still a very profitable investment.

However, the problem with certification can be the fact that these certificates are assigned for meeting various criteria, such as labor standards or emissions reduction. That's why it's a good idea to know the basic differences between all the standards or use a company that is familiar with them. If we already know what our expectations are then the matter is already simpler.

Brookfield Partners owns the largest database of office buildings in Poland – officelist.pl. For a long time, seeing the changing trends, we have also started monitoring office buildings for their certification, so we are able to efficiently select a list of offices that will meet the client's guidelines. This makes the very process of finding a location that meets the company's requirements quite quick.

Quite a few benefits come from checking what certificates buildings have, and still most companies ignore this information. Above all, companies that reduce various types of emissions not only affect the environment, but also lower costs, as there is less operational wear and tear.

Has the adoption of ESG standards re sulted in noticeable changes in the cost structure of property rentals in Poland? Are there any particular challenges or obstacles that companies encounter when striving to meet these standards in their real estate choices?

Our office market is a fairly young market and very many office buildings have been completed in recent years. This is definitely a big plus, as it means that many office buildings meet high environmental standards. With inflation on the rise, it is becoming increasingly clear that the difference in maintenance fees between older and newer office buildings is widening. Sometimes it's better to choose a newer building with a higher rent than an older one, because by lower operating costs in a new building the final costs will be similar.

The problem with older office buil dings is that they often have problems meeting environmental standards. This is due to the high cost of carrying out changes, but also very often such changes are not even feasible for technical reasons.

It seems to me that environmental awareness itself is also very important for many companies, and it doesn't even have to involve saving money. Interestingly, recent market research shows that ESG issues are quite important to investors and tenants. As many as 47% of investors and 40% of tenants are able to pay more for an ESG-certified building.

Thank you for the interview.

This article comes from magazine:
FOCUS ON Business #14 January-February (1/2024)