Every property is social by nature, as it affects societal coexistence, according to one definition. However, defining and operationalising social goals to concretely implement and measure them is much more challenging. And there are conflicts between the three ESG sustainability pillars, particularly between Environment (E) and Social (S).

It is clear that environmental protection costs money. Specifically in real estate that involves insulation, photovoltaics, sustainable building materials, good conditions for construction workers, and so on. Ultimately, the users of the property have to pay for all these.

In terms of housing, an optimal renovation of existing buildings leads to significantly higher rents. Is this social in the sense of one of the central S-goals, affordable housing? For many tenants, the answer is No. They cannot afford base rents of 15 euros or more per square meter. This remains true even if insulation lowers energy costs, partially offsetting the rent increase through lower utility bills.

This conflict between „S“ and „E“ can’t be completely resolved through adjustments, but it can be alleviated. For instance, the demands on „E“ could be reduced. Renovation does not have to achieve the current technical optimum. Insulation with (environmentally friendly) materials, photovoltaics on the roof or as a communal system, the use of district heating, hot water from solar collectors – all these should be considered from the perspective of economic viability for the (current) tenants.

Nevertheless, this assessment has its limits. For example, subsidies from promotional bank KfW are only available if certain minimum standards in energy efficient renovation are met. And those who want to use environmentally friendly insulation materials have little choice, and often must pay more than for conventional materials (like the usual polyurethane foam).

Moreover, there are investors who expects a reasonable return on their money. Understandings of „reasonable“ can vary widely. A venture capital investor has much higher return expectations than traditional pension funds or some family offices. A „social discount“ directly affects the beneficiaries of insurers or pension funds. However, with highly diversified investments, this discount is likely to be manageable.

And this discount can be made palatable to the customer or pensioner. More and more people are taking social responsibility in the face of increasing income and wealth disparities – even in the form of lower returns.

Affordable housing is just one of many goals that fall under „S“. Two years ago, the EU-level Platform on Sustainable Finance proposed a social taxonomy. This was intended to channel more capital into activities that uphold human rights and improve living and working conditions.

But there is a significant difference between environmental goals (implemented in the EU Environmental Taxonomy) and a proposed social taxonomy. Environmental goals and criteria are based on scientific findings. In contrast, a social taxonomy is derived from internationally binding norms such as the UN Sustainable Development Goals (SDGs), making it significantly harder to operationalise. Nonetheless, there are already initial steps in this direction. The Institute for Corporate Governance in the German Real Estate Industry (ICG) has developed a scoring model to measure S-criteria for social impact. Based on this, conflicts of interest in sustainability can be more easily resolved.