Will the carbon footprint become a new legal defect for real estate?

A property's carbon footprint is increasingly influencing its market value, transitioning from a niche metric in sustainability reports to a significant factor in real estate transactions and financial assessments. Investors, financial institutions, and legal professionals are now scrutinizing environmental parameters, evaluating properties not just on their current condition but also on their adaptability to climate change.

This shift is largely driven by the European Union's climate policy, notably the Energy Performance of Buildings Directive (EPBD), which took effect on May 28, 2024. The directive aims to progressively enhance building energy efficiency, targeting zero-emission new buildings by 2030 and complete decarbonization of existing building stock by 2050. Consequently, property owners must anticipate not only current operating costs but also future expenses related to energy-efficient modernizations.

The transition from environmental risk to legal risk is becoming clear. A building may be legally constructed and operated without current legal claims, yet its owner might face mandatory modernization expenditures to comply with new climate regulations. This risk stems not solely from the present legal framework but also from the trajectory of future regulations and the obligations they may impose on property owners.

Traditional due diligence (DD) for commercial properties, which historically focused on past ownership, administrative decisions, and existing contracts, is now evolving. Prospective DD must be more forward-looking, incorporating a thorough verification of a building's energy performance. Growing tenant demand for ESG (Environmental, Social, and Governance) compliance and EU regulations mean that buildings failing to meet modern standards risk losing investment appeal. Institutional investors increasingly demand comprehensive ESG analysis, including carbon footprint assessments, environmental certifications like BREEAM and LEED, EU Taxonomy compliance, and the potential for energy retrofitting.