The Importance of ESG for Luxembourg Real Estate Portfolios

The benefits of integrating sustainability factors go beyond reducing climate risks. Environmental, Social, and Governance, also known by its acronym, ESG, has become a vital consideration in Luxembourg as investors develop an enhanced focus on sustainability and proves itself more impactful in the long run. 

ESG can be structured around several processes:

  • Pre-Screening

The main reason behind this process is to pre-determine mitigated risks and avoid projects related to potential issues or controversial social and environmental impacts, or those that are backed by a controversial organization. For instance, a project whose main investor or sponsor has been identified to be responsible for Human Rights Violations may not be eligible for any form of investment. 

  • Implementation of Taxonomy Specific to Various Assets

This process involves a thorough analysis of infrastructure and real estate; its contribution and impact on ecological and energy transitions. Additionally, it contributes to social impact with the goal to drive the portfolio construction towards green and sustainable assets. 

  • ESG Performance Evaluation

By utilizing data research and in-depth analysis of pressing issues based on prevailing ESG indicators and industry-specific criteria, we can clearly see comprehensive and qualitative information of primary ESG issues. For instance, investors can take a look at the relevance of biodiversity in a solar project or how a social license to operate influences an ultra high-speed broadband project.  

  • Finalizing ESG Selection by a Third-Party Expert

Finalizing the selection process involves environmental and climate impact assessment done by an independent expert to ensure that investment opportunities will bring gains in the long run. 

  • Annual ESG Reporting

An annual report is submitted to feature quantitative elements such as ESG evaluation of all portfolio conditions, percentage of investments with positive or social impact, and climate and environmental impact reports compiled by a third-party provider. The annual report is complemented by a thorough analysis of the improvement of each asset’s ESG practices on a yearly basis. 

Fund managers are well aware of the importance of integrating ESG factors into real estate portfolios as more investors belong from the tech-savvy and eco-conscious Gen Z generation. To that end, fund managers adapt to meet the growing demands of present and future clients to stay ahead of the competition. 

Utilizing ESG in Luxembourg will unlock the liquidity in the real estate market. Of course, ESG integration with real estate investments has been around for a long time. However, due to the overwhelming shift towards investing on ESG over the last five years, but recent panel discussions at ALFI PE/RE conference have made a lot of people think about how this practice can grow over time. Will this affect investors with existing properties but without ESG considerations? What is the role of technology in this investment set up? The truth is, many real estate properties are at great risk of being stagnant if ESG factors are not incorporated into their real estate portfolios. 

To prevent frozen assets accumulation, fund managers should immediately identify ways to integrate the ESG practice into their real estate portfolios without the negative practice of greenwashing while being able to communicate its importance effectively to investors. 

And nowhere in the world presents an attractive environment for fund managers to start a real estate portfolio than in the Grand Duchy of Luxembourg. By developing a variety of labels attributed to different sustainability factors such as Environment, Green Bond, Climate Finance, and ESG, initiatives can accurately create an ESG eligibility criteria resulting in an environment where fund managers can take the necessary steps towards a more ideal, sustainable financing. Additionally, a consistent approach to ESG measurement across the jurisdiction will enable fund managers to conduct a comparative analysis on ESG contributions made for real estate assets against an industry-recognized standard. This meticulous process will ultimately inspire fund managers to immediately integrate ESG principles into their existing portfolios, raise capital for sustainable investments, and produce better returns for clients. 

The Role of Technology in Risk Monitoring and Mitigation

Technology plays a vital role in preventing real estate assets from being stranded altogether. Whilst labels clearly identify ESG factors for fund managers to utilize and comply with, it is the role of technology service providers to measure the performance of assets and communicate vital information to investors. 

Therefore, it is essential that asset service providers equip managers to showcase the value added in line with what investors consider high value elements in their business endeavours. Technologies such as robotic process automation or RPA facilitates the release of most critical resources, so  that fund managers can focus on more valuable work. Asset managers should use technology to collect ESG performance data and convert them into smart and easy-to-digest information through an easily accessible platform. This is where both fund managers and investors can view portfolio performances in real time, providing them a clear view of their investments. 

Luxembourg is Championing Sustainable Finance in Europe and Beyond

Europe’s sustainable investment landscape is ever-changing. Luxembourg’s economic prowess has been growing steadily over the years. It is to no surprise that this small yet progressive landlocked country is the top domicile for ESG or sustainable funding in Europe. Its ecosystem and long-standing expertise in the ESG discipline is made evident by its sustainable funds accounting at EUR 371 billion by the end of 2020, capturing up to 44% of the total net flows made across all European domiciles in recent years.

Sustainable Finance Disclosure and Taxonomy Regulations

In March 2021, investment funds and asset managers are required to adhere to the main provisions set by the Sustainable Financial Disclosure Regulation. At the very least, all investment funds by investors shall define in their respective prospectus how sustainability risks were successfully integrated into their business decisions. 

On the other hand, asset managers who wish to offer products and services with sustainability as its main selling points have two options:

  • Under Article 8 which clearly points to investment funds that promote environmental or social qualities
  • Under Article 9 which clearly points to investment funds with an emphasis on sustainability

Damalion is ever supportive of investors in their pursuit of integration and compliance with ESG principles into their real estate portfolios. If you wish to learn more how we can help you in this valuable project, contact us today.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.