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Green buildings: Aligning institutions, investors, and society

28/07/2022

The real estate and construction sector is recognized as one of the most important pillars of the Cypriot economy. That is due to its contribution to the Gross Domestic Product (GDP) which exceeds 10%, the fact that it employs thousands of workers, and because it is traditionally a sector that attracts Foreign Direct Investment (FDI).

At the same time, its contribution to the new norm that is taking shape internationally and primarily at the level of the European Union (EU) in relation to the mitigation of climate change is expansive. Through Regulation 2020/852 (EU Taxonomy) regarding the establishment of a framework to facilitate sustainable investments and Regulation 2019/2088 (EU SFDR) on sustainability disclosures in the financial services sector (Sustainable Finance and Investments), specific technical criteria have been established to set the conditions under which the Real Estate Sector is expected to contribute significantly to the mitigation, inter alias, of climate change and Sustainability. It is imperative to determine whether this economic activity does not significantly burden any of the other environmental and sustainable development objectives, targeted by the relevant international and EU regulations (Environmental, Social, Governance -ESG).

Rightly so, the EU attaches particular importance to the sector, as it is estimated (2020) that buildings are responsible for around 40% of energy consumption and 36% of carbon emissions in the countries of EU. The technical audit criteria range from construction of new buildings, renovations, installation of energy efficiency equipment, on-site renewable energy sources, provision of energy services and building ownership.

Particular emphasis is placed on every aspect of a building’s construction, from roof and wall systems to energy-efficient windows and doors, energy-efficient electrical appliances, and water and space heating, cooling, and ventilation systems. The EU Regulations, with constant upgrades, foresee and emphasize a greater depth of detail of the construction materials and facilities used in the development of a building. They take into account e.g. the development of vegetation, the energy-efficient systems of automation and use of solar energy, the electrical devices, and the monitoring of the main loads of electricity or heating of the buildings. At the same time, similar emphasis is given in relation to the transition to a circular economy, which is why the EU requests the adoption of techniques that support, among other things, the reuse of secondary raw materials and reusable construction materials. Actions such as planning for high durability, recyclability and easy disassembly and adaptability of the products manufactured and promoted for use throughout the construction sector are important. It is reminded that special criteria have been set for the raw materials, which produce products such as cement, aluminium, iron, and steel.

Obviously, this is not a technical article, which claims a top spot in the field of building construction and land development. All the above, however, are a good indication of what the transition to green and sustainable development means in practice for the real estate sector. Essentially, buildings can no longer simply be named “green” without certain certifications; otherwise, the “Greenwashing” phenomenon is right around the corner. As noted in a previous article, it has been observed that the consequences of Greenwashing can be financial, but mainly has consequences on the reputation of a company or of an organisation.

Given the long-term development of the sector in Cyprus and the descent of reputable international companies in the island, mainly from the tech field, the demand for modern and environmentally friendly office and residential buildings is strong. Both for purchase and for rent. Such companies place particular emphasis on Sustainability issues due to the corresponding pressure they receive from their investors, prompting them to seek for buildings that meet the aforementioned environmental and ESG criteria. It is an admitted fact that today the demand for “green” buildings exceeds the supply. That is why in the medium term -and this pertains the buildings that are in the process of licensing or construction today and in the near future, ESG functional criteria should be considered.

It is reminded that formally as of 2021, credit institutions are obliged to disclose and report on additional requested environmental impact studies before proceeding with the lending of a project (Sustainable Finance). Further, as noted in an earlier article, in principle, as from 2024, is expected that investments made or advised by financial market participants (FMP) or large organisations and government authorities shall be financially reported. Such information shall be made publicly available to consumers, by utilizing the new upgraded Corporate Governance Financial Reporting Framework, as proposed by EU for consistency purposes (CSRD EU Directive – amending NFRD EU Directive 2014/95/EU, which has been implemented into Cyprus Companies Law Cap.113 by an amendment LawL.51(I)/2017, the CSR).

Entrepreneurs in the land development and real estate sector are required to consider and follow the rules for developing or servicing greener buildings. In the short-term, the costs may be higher, but the benefits are enormous since European institutions, international investors, buyers/tenants and society seek the creation of green buildings. By applying the right strategy and following the appropriate criteria, real estate and construction companies in Cyprus can contribute to the ultimate national effort for a better world by creating conditions for long-term sustainability and supporting the implementation of the Sustainable Development Goals (SDGs).

Lawyer, Corporate Commercial Banking, ESG, Sustainable Finance, LLB. LLM (UCL). LPC, CISL, University of Cambridge.