ESG and corporate governance – Focus on new obligations for real estate companies

The topics of ESG (environmental, social, governance) and corporate governance are increasingly becoming the focus of legal and economic discussion, especially since further regulations came into force at the beginning of 2025. This poses particular challenges – but also opportunities – for real estate companies, which are traditionally considered key players in urban development and resource consumption. In this article, we examine the legal implications and obligations arising from ESG and corporate governance for companies in the real estate sector.

I. What does ESG mean in the real estate industry?

The acronym ESG stands for Environmental, Social and Corporate Governance. These three dimensions form the foundation of sustainable corporate governance. Given that buildings account for around 40 per cent of global energy consumption and 36 per cent of CO2 emissions, and that real estate also creates social spaces, the real estate industry is particularly important not only from an environmental perspective, but also from a social perspective. This raises the following specific questions for real estate companies today:

• How can real estate be developed, built and operated in such a way that the ecological footprint is as small as possible? This primarily concerns the energy efficiency of buildings, the use of sustainable building materials and the reduction of CO₂ emissions (keyword: environmental).
• How can social aspects such as affordable housing, accessibility and fair working conditions be taken into account in projects? This particularly concerns the treatment of tenants, residents and other stakeholders (keyword: social).
• What mechanisms can a company use to ensure transparency, integrity and compliance with legal requirements? This includes aspects such as risk management, compliance and the avoidance of conflicts of interest (keyword: governance).

And real estate companies must do all this against the backdrop of 

• increasing energy efficiency and climate protection requirements for new and existing buildings;
• increased reporting obligations, especially for companies with large real estate portfolios; and
• financial incentives and penalties that reward sustainable buildings and make inefficient properties less attractive.

This It is no longer just a question of ‘green roofs’ or energy efficiency. ESG covers the entire life cycle of a property, from site selection and planning to construction, use of materials and energy consumption to tenant structure and portfolio governance, as well as renovation and utilisation – in other words, not just ‘from cradle to grave’, but rather ‘from cradle to cradle’. In this respect, ESG in the real estate sector means that companies and properties operate in a way that protects and strengthens the environment, people and structures in the long term, without focusing on short-term efficiency gains.

II.    Legal requirements for real estate companies

ESG is no longer a purely voluntary commitment. Numerous legal requirements and regulatory developments oblige companies to integrate ESG criteria into their business models. In addition, investors and banks are increasingly demanding ESG-compliant strategies, particularly due to the provisions of the EU Taxonomy Regulation, the EU CSRD Directive and the Supply Chain Due Diligence Act. However, the Energy Saving Ordinance and the Building Energy Act also require compliance.

1.    EU Taxonomy Regulation

The EU Taxonomy is widely regarded as a milestone in sustainability reporting because it defines which economic activities are considered environmentally sustainable. For real estate companies, this means that they must demonstrate that new construction projects or renovations, for example, comply with EU environmental targets, for example through energy efficiency measures.

2.    EU Corporate Sustainability Reporting Directive (CSRD) 

From 2025, this EU directive will extend the sustainability reporting obligation to real estate companies with more than 250 employees or an annual turnover of more than EUR 40.0 million. Specifically, the CSRD requires companies to comprehensively disclose the impact of their activities on the environment and biodiversity. In addition, property owners must demonstrate how energy-efficient their buildings are and what measures have been taken to reduce CO₂ emissions. As a result, greater biodiversity, sustainable building materials and a circular economy are required, for example.

3.    Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz – LkSG)

Although the German Supply Chain Act primarily focuses on human rights and environmental aspects in the supply chain, it is also relevant for real estate companies. Under the LkSG, they must ensure that building materials come from sustainable and fair sources and that their suppliers comply with human rights standards.

4.    Energy Saving Ordinance (Energieeinsparverordnung – EnEV) and Building Energy Act (Gebäudeenergiegesetz – GEG)

In the area of environmental protection, national regulations such as the EnEV and the GEG play a particularly important role. Real estate companies must therefore ensure that both new and existing buildings are energy efficient and comply with legal standards.

III. Corporate governance: a question of responsibility

Corporate governance forms the backbone of the ESG strategy demanded of entrepreneurs by politicians and society. Real estate companies are faced with the task of creating internal structures and processes that enable a sustainable orientation. From a legal perspective, this gives rise to the following key points in particular:

• Duties of management: Managing directors have a duty to incorporate sustainability aspects into their corporate decisions. This arises in particular from the general duties of care incumbent on management under Section 93 of the German Stock Corporation Act (Aktiengesetz – AktG) and Section 43 of the German Limited Liability Companies Act (Gesetz betreffend die GmbH – GmbHG).
• Risk management and compliance: Any effective risk management system in a company must take ESG risks into account, such as rising CO₂ prices or reputational risks due to social conflicts. Companies should also ensure that they comply with all relevant ESG requirements in order to minimise liability risks.
• Transparency and reporting requirements: The increasing requirements for the disclosure of ESG data necessitate clear processes and systems within a company. Reporting must therefore not only be accurate, but above all verifiable in order to meet regulatory requirements.

IV. Practical tips for real estate companies

The integration of ESG and corporate governance into a company is a complex and ongoing process. From a legal perspective, the following recommendations for action can be derived:

• Develop your own ESG strategy: Companies should develop a comprehensive ESG strategy that includes both long-term goals and short-term measures for companies.
• Ensure legal compliance: It is essential to keep an eye on existing and upcoming legal requirements and to take early action to ensure compliance.
• Adapt internal structures: ESG should not be seen as an additional task, but as an integral part of corporate management and culture. This includes regular employee training and the regular review and adaptation of internal corporate governance structures.
• Involve stakeholders: Real estate companies should actively communicate ESG issues with their stakeholders, such as tenants, investors and authorities, in order to build trust and acceptance.

V.    ESG reporting for property owners

Reporting involves the systematic collection, evaluation and disclosure of information on ESG data. Particularly in the case of larger portfolios or mixed-use properties, implementation requires precise data management, transparent processes and regular review of ESG targets. Owners face complex challenges in this regard – from selecting suitable indicators to preparing compliant reports in accordance with EU taxonomy or CSRD. Typical ESG metrics in real estate reporting are

Environmental

• Energy consumption (kWh/m² per year, broken down by electricity, heating, cooling)
• CO₂ emissions (kg CO₂/m² per year or absolute)
• Share of renewable energies in total consumption
• Water consumption (litres/m² per year)
• Waste generation and recycling rate
• Certification status (e.g. DGNB, LEED, BREEAM – weighted by property)
• Renovation rate within the portfolio (annual modernised area in %)

Social

• Proportion of barrier-free units
• Tenant turnover (ratio of terminated to rented space)
• Rent control / social housing ratio
• Customer satisfaction index (e.g. through surveys)
• Number of social projects or neighbourhood initiatives
• Working conditions at external service providers (e.g. cleaning services, security)

Governance

• Existence of an ESG concept / mission statement
• Proportion of ESG-related training courses for employees
• Anchoring of ESG criteria in management / supervision
• Regularity of ESG reporting (e.g. annually, quarterly)
• Use of ESG criteria in supplier selection
• Whistleblower system / compliance structures

VI. Conclusion

ESG and corporate governance have long since ceased to be purely moral or voluntary issues – they have long since become part of the legal and regulatory framework. For real estate companies, this poses a twofold challenge: (1) regularly reviewing and adapting their own business model to social and legal requirements, and (2) constantly monitoring and observing potential legal risks. Addressing these issues early and comprehensively is not only legally necessary, but also makes good business sense, as studies show that ESG-compliant companies are increasingly preferred – whether by investors, tenants or business partners.

The message can therefore only be: those who take ESG and corporate governance seriously are not only on the safe side legally, but also lay the foundation for long-term success in the real estate industry.