Italy: an upturn in ESG driven by State incentives

The Covid-19 pandemic has impacted Italy more severely than most European countries. Italy was the first on the European continent to have a major outbreak, and its death toll remains among the highest. This national disaster has brought renewed awareness of the need for sustainability.

“The pandemic has reminded us all of the fragility of our society and our ecosystem”, explains Luigi Miranda, Head of Asset Management at BNP Paribas Real Estate Investment Management (REIM) in Italy, “and this experience has put ESG much higher up the agenda”.

Historically, the focus of ESG initiatives in Italy has been on reducing energy consumption. As a reminder, in the world, buildings account for 36% of the final energy consumption and c.40% of energy-related greenhouse gas emissions. To address this issue, major cities like Milan and Rome have adopted strict emission reduction targets.

However, wasted energy from older buildings remains a significant challenge. Just 10% of existing buildings are rated energy-efficient. The key to addressing the issue is therefore to upgrade older constructions, but only 1% of buildings currently undergo energy-related renovations every year.

The Italian government has been proactive in stimulating energy efficiency in real estate. Its stated ambition is to double the renovation rate, with some 35 million buildings upgraded over the next 10 years.

Initially introduced in 2007, the ecobonus has been reviewed several times and now entitles those who undertake energy requalification work to a tax deduction of 50% or 65%, depending on the type of work. Since the ecobonus first passed into law, some €42 billion have been invested in energy requalification, including €3.5 billion in 2019.

In 2020, the Italian government went a step further, implementing the superbonus incentive. This new measure offers a tax credit of 110% on building renovation projects centred on energy requalification and seismic structural improvements. Initially set to finish in 2021, the initiative has been extended until the end of 2022. 

“The superbonus comes on top of EU regulations such as the Sustainable Finance Action Plan and EU taxonomy, and has given a real boost to ESG-driven asset investment”, says Luigi Miranda. “Investors are now less hesitant to upgrade buildings because capital expenditure is offset by the superbonus.”

The Italian real estate market may not be as dynamic in terms of ESG as the UK, Germany or France, but the combination of regulations and incentives have significantly raised the profile of ESG in the last two or three years.

“Investors are increasingly evaluating assets in terms of ESG during the due diligence phase”, explains Luigi Miranda. “And more and more owners and operators are integrating environmental performance into their business strategy.”

Moreover, Italian investors are starting to see the value of energy-efficient real estate. According to several analyses, buildings with an ESG strategy in Italy yield c. 10% more value, and constructions classified A1 (the highest environmental category in Italy) reduce the cost of heating, cooling and hot water by 75%.

“Last year, we invested almost €500 million in purchasing Italian assets with environmental certification”, says Luigi Miranda. “And we are confident they will be profitable thanks to higher rental values, tenant attractivity and retention, and increased ROI in the long term.”

In general, Italian tenants are showing a growing interest in green-certified buildings. However, there is a certain degree of reluctance among tenants to share their data and work with property owners and managers towards ESG topics.  

“Building relationship with tenants is crucial to managing ESG issues in areas such as energy consumption, recycling and wellbeing”, says Luigi Miranda. To encourage tenants to engage with the ESG improvement process, BNP Paribas REIM has implemented a number of measures. These include introducing clauses in rental agreements encouraging them to share information about their place of work, including data about waste, energy, water consumption and greenhouse gas emissions.

The company is also working with property managers to educate tenants by creating ESG handbooks with advice on energy performance, organising regular meetings with tenants, distributing newsletters, and carrying out tenant satisfaction surveys.

“ESG-driven assets attract reliable tenants who provide secure income”, explains Luigi Miranda. “That’s why we need to invest not just in energy efficiency, but in the environment of offices”. There is an emerging trend in Italy to better manage the communal areas of buildings in order to enhance occupant wellbeing. Investors and property managers are increasingly considering criteria such as transport connections, access to EV charging stations and biking parking, fitness centres, etc.

Upgrading buildings can be particularly challenging when they are already occupied. In 2020, BNP Paribas REIM acquired the Bodio Center in Milan. With a surface area of 54,000 m², the complex hosts 5 office buildings, plus retail and service facilities. Occupancy is 92%, so any ESG initiatives must cause minimum disruption to tenants.

Through an energy consumption analysis, BNP Paribas REIM is seeking to improve the building’s energy performance. This will simultaneously reduce service charges for tenants, encouraging them to participate in the initiative. The restoration project also centres on enhancing the building’s communal areas to boost occupant health and wellbeing. A number of technology-based solutions are currently under study, including the use of smart sensors to optimise heat management and ventilation, and the integration of eco-friendly materials to reduce building waste and noise pollution.

“This is the right time to invest in ESG”, says Luigi Miranda. Government initiatives and market trends are creating favourable conditions for investors in Italy, and the post-pandemic European Recovery Plan will create additional funds for sustainable investment. “We have a unique occasion, and I hope the real estate sector seizes it, because everyone stands to benefit”, he concludes.

Sources: International energy agency, 2019, ENEA, 2020, Scenari Immobiliari, 2020