Shaping the path ahead: The future of ESG in Portuguese real estate

In recent times the concept of Environmental, Social, and Governance (ESG) has gained traction across various industries in Europe. The real estate sector, known for its impact on the environment and communities, has been at the forefront of this transformative movement. In Portugal, a country renowned for its rich cultural heritage and stunning landscapes, the integration of ESG practices into the real estate sector is becoming increasingly paramount.

 

ESG in real estate: A brief overview

ESG in real estate includes a range of practices and initiatives that aim to improve the industry's impact on the environment, society and corporate governance. These principles go beyond financial metrics, emphasizing sustainability, transparency and social responsibility.

• Environmental sustainability: Reducing the carbon footprint of buildings, promoting energy efficiency, sustainable construction materials, and waste reduction are integral aspects of environmental sustainability in real estate. In this regard, we highlight the increasing implementation of solar panels, electric vehicle chargers and natural light in real estate allowing the investors to gain energy efficiency and saving costs.
• Social responsibility: Ensuring that real estate projects contribute positively to local communities by providing affordable housing, green spaces, and amenities that enhance the overall quality of life in its best shape and form. Social impact is the main focus at the moment in ESG policies in Portugal.
• Governance: Maintaining high ethical standards, transparent business practices, and accountability in decision-making processes to instill trust among investors, stakeholders, and the general public.

 

The growing significance of ESG in Portugal

Portugal's known unique blend of historical charm and natural beauty has made it an attractive destination for real estate investments. As global awareness of climate change and social issues intensifies, the incorporation of ESG principles becomes critical for sustainable growth in the real estate sector.

• Regulatory environment: The Portuguese government, aligned with EU directives, has been enacting policies that encourage ESG integration. These regulations include energy efficiency standards for buildings, incentives for renewable energy adoption, and guidelines for sustainable urban development. Portugal is still in a preliminary stage in ESG legislation, as it still merely includes an obligation of an energy certificate in buildings for newly built properties, and property sales or leases (Decree-Law no. 101-D/2020, dated 7 December). In the current legal framework, there is still no link between the poor classification and the sale or lease of the property, as properties may still be sold or let even with poor energy performance classifications. Nonetheless, it’s still an important factor for institutional investors making decisions. The Portuguese parliament and government will have a key role in bringing new legislation into light that enhances energy efficiency improvement in buildings as a legal obligation. It’s worth noting the efforts to incentivize and support renewable energy, for instance regarding solar panel installation in buildings, HVAC, and windows, partially supported by the Fundo Ambiental. The law is still behind real life, so in the next few years the Portuguese legislation will accommodate some necessary provisions in the law to introduce these standards in buildings, so it may be sold, let or even subject to financing by the banking system.
• Investor preferences: Institutional investors are increasingly considering ESG factors in their decision-making processes. Real estate developers and companies that prioritize sustainability and social responsibility are more likely to attract long-term investments.
• Tenant demand: Modern tenants, particularly younger generations, are displaying a preference for eco-friendly and socially conscious properties. Developers who adapt to these evolving preferences can enhance property demand and value.
• Economic resilience: ESG practices can lead to cost savings through energy efficiency measures, lower operational expenses, and enhanced property durability. As the world shifts toward more sustainable practices, ESG-compliant buildings are likely to remain competitive and resilient in the market.

 

Challenges on the path forward

While the benefits of ESG integration in Portuguese real estate are evident, several challenges must be addressed for the vision of a more sustainable future to be realized.

• Retrofitting existing buildings: Much of Portugal's real estate landscape comprises historic buildings with limited adaptability to modern sustainability standards. Balancing preservation with necessary upgrades poses a significant challenge.
• Awareness and education: Both industry professionals and the general public need to be educated about the value of ESG in real estate. Many stakeholders may still perceive ESG initiatives as expensive or unnecessary. In addition, many companies throughout Portugal still crave knowledge on ESG. Although many companies have already pinpointed their ESG policies, competent ESG practitioners are still being recruited to implement those policies. So this is a huge investment opportunity for law firms and specialized European ESG services companies providing this knowledge in Portugal.
• Access to financing: Implementing ESG measures, such as energy-efficient technologies (ie efficient energy performance windows, thermal insulation in buildings, HVAC, solar panels), may require upfront investments that not all developers can readily afford. Access to financing options that support sustainable practices is crucial.
• Regulatory gaps: While regulations exist, there might be gaps in enforcement or inconsistencies that need to be addressed to ensure a level playing field for all real estate players. In Portugal, DLA Piper is shaping the path ahead by implementing green clauses in Portuguese property related agreements, notably standard clauses concerning the assets’ ESG certification and the insertion of obligations for each of the parties (either in transactions or leases) within the implementation of brand-new best practices or legal measures that may be soon enacted in ESG.

 

Collaborative solutions for a sustainable future

To shape the future of ESG in Portuguese real estate, collaboration among various stakeholders is paramount.

• Government and regulatory bodies: Continued alignment with EU directives and the introduction of targeted incentives can encourage real estate developers to adopt ESG practices. Legislation could be adopted to some extent implement building certifications such as the BREEAM, LEED and WELL. The BREEAM certification (Building Research Establishment Environmental Assessment Method) from the UK, the LEED certification (Leadership in Energy and Environmental Design) from the US and the WELL certification (WELL Building Standard) also from US, are some of the internationally well-known key certifications for real estate.
• Developers and construction industry: Embracing innovative construction techniques, sustainable materials, and energy-efficient designs can transform the industry's environmental impact. Although there is no legal obligation yet to install solar panels in buildings as an example, the truth is that investors and developers in Portugal are embracing such innovative and energy-efficient techniques to enhance the reduction of energy costs and improve sustainability.
• Investors: Institutional investors can use their influence to drive ESG compliance by considering sustainability criteria in their investment decisions.
• Communities and consumers: Demand for sustainable and socially responsible properties can encourage developers to prioritize ESG initiatives that align with community needs.

 

Conclusion

The future of ESG in real estate in Portugal holds promise and potential. By fostering a collaborative environment that involves government bodies, developers, investors, and communities, Portugal can create a real estate landscape that aligns with global sustainability goals. Through ESG integration, Portugal can not only protect its cultural heritage and natural beauty but also set an example for other nations to follow in the journey towards a more sustainable and responsible real estate industry.