Sustainable construction and ESG reporting in the commercial real estate sector in Poland

According to the World Economic Forum, buildings are responsible for 40% of global energy consumption and almost 40% of total greenhouse gas emissions. Therefore, the European Commission (EC) proposes that from 2030 all new buildings should be zero-emission.

In Poland, there are still few commercial properties that do not require an external energy supply (eg Centrum Badawczo-Rozwojowe in Cracow, equipped with trigeneration system). However, the growing environmental awareness of consumers, real estate investors and tenants has led to an increasing number of developers and property managers treating sustainable development as a priority. This has resulted in the introduction of new solutions aimed at reducing the environmental impact of commercial buildings, especially in terms of electricity and water consumption. Popular solutions include PropTech (which is based on the Internet of Things (IoT)) that monitors consumption, temperature, security, utility control systems and Building Management Systems (BMS), which are used to manage lighting (eg Digital Addressable Lightning Interface), heating, air conditioning and alarm installations.

Other common solutions include green parking spaces, electric vehicle charging stations, city bike stations, photovoltaics, using rainwater, plastic bottle vending machines, flower meadows or greenery near the facility.

In Poland, until now, property owners have tried to respond to tenants’ sustainability expectations by certifying their buildings. However, considering the growing awareness and needs of companies as well as global initiatives such as the Race to Zero or the World Green Building Council’s (WGBC) Net Zero Carbon Buildings Commitment, green certificates may soon prove to be insufficient to attract tenants. This may also make it more challenging to obtain financing from banks which have committed to achieving a certain portfolio of facilities granted to ESG-compliant projects.

EU raises the bar for regulatory ESG reporting requirements

In order to meet the growing expectations of the market, in April 2021, the EC presented a draft amendment to the Corporate Sustainability Reporting Directive (CSR Directive). It is intended to amend the European Parliament’s Directive 2014/95/EU on the disclosure of non-financial and diversity information by certain large undertakings and groups (NFRD). The amendments are to be implemented by the member states by 1 December 2022.

What information will be reported under the amended Directive?

The proposed regulations of the amended CSR Directive emphasise environmental issues, in particular greenhouse gas emissions, water resources and biodiversity, as well as labour issues and human rights. The latter are to be reflected, among other things, in the obligation to exercise due diligence when selecting supply chain partners. Companies will no longer be able to plead ignorance that a component or product supplied to them was produced using child labour, forced labour or under conditions that endangered the life and health of workers.

A single European standard for non-financial reporting

Currently, companies are fully free to choose the standards for their non-financial reports, and the data contained therein is not subject to verification. Admittedly, reporting companies should take into account the requirements of the European Commission’s 2019 Guidelines for reporting on climate change issues, but according to data presented by the Association of Listed Companies, few companies in Poland comply with them.

As a result, investors have a low opinion of the quality of the non-financial reports of companies and therefore obtain their information from various other sources.

This is about to change, as one of the key changes provided for in the draft CSR Directive will be the unification of the European reporting standard and the development of a simplified version for smaller companies. These changes are aimed at ensuring coherence and above all the ability to compare data provided by various companies.

Another change is that ESG reports will be subject to mandatory audit by a statutory auditor or another authorised entity. The reports will be prepared in electronic form (XBRL format), which will enable their verification, and they are to be published as part of the annual report on the company’s activities.

Not only large entities will be required to report

For the last three years, the non-financial reporting obligation in Poland has been imposed only on large, listed companies, ie those which employ more than 500 people and meet the financial criteria (a balance sheet total over €18.5m or net revenue above €37m).

The draft CSR Directive provides for non-financial reporting as of 2023 not only for listed companies, but also for non-public companies with more than 250 employees. This means that approximately 3,600 companies in Poland will be obliged to report on ESG matters, which is a significant increase compared to the present situation in which only about 150 companies are subject to such an obligation. As of 2026, the obligation of non-financial ESG reporting would be imposed on public companies employing more than 10 employees as well.

The amended directive imposes the reporting obligation not only on companies with their seat in the EU, but also on companies from outside the EU operating in the EU market.

CSR Directive may be a big challenge for Polish real estate companies

Market expectations and regulatory changes will force real estate companies to take serious action towards sustainable development and will also increase reporting obligations. Developers, property owners and managers who have not been covered by ESG reporting so far will have to prepare by collecting the necessary data. They should respond in a timely fashion to the changes brought about by the growing environmental and social awareness by creating their own ESG strategies and polices. This is particularly the case since ESG issues are already having an increasing impact on real estate transactions in Poland.

It is expected that in the following years the majority of the commercial real estate investors will want to primarily include properties that meet the criteria of an ESG strategy in their portfolios. Neglecting sustainable construction and operation principles during the construction or upgrade of an office building or warehouse may ultimately result in those properties being less attractive to buyers/investors and therefore less valuable on the market.