In the wake of the climate emergency, the European Union (the "EU") has set a bold objective for the real estate sector: to achieve carbon neutrality by 2050. This ambition reflects the dual reality of the sector: on the one hand, its significant impact on the environment, and on the other, the growing demand for eco-friendly buildings.

For real estate actors, whether investors, developers, companies, design offices, intermediaries or consultants, it is essential to understand not only the direct impact of current and future environmental regulations, but also the sometimes less visible implications of ESG (Environmental, Social and Governance) regulations.


Ambitious technical standards and certifications

The sector is faced with increasingly stringent technical standards, aimed at reducing its carbon footprint and greenhouse gas emissions. Among these standards, certifications such as BREEAM and LEED play an essential role. These certify the environmental performance of buildings and are now essential for developers to meet the demands of investors and tenants.

Regulation 305/2011/EU on construction products and Directive 2010/31/EU on the energy performance of buildings are currently being revised,[1] demonstrating the EU's commitment to strengthening sustainability criteria in the real estate sector.

These revisions, motivated by the ambition to reduce environmental impact, require companies to adopt more rigorous eco-friendly practices based in particular on the use of greener construction materials, the promotion of sustainable building, and the implementation of circular economy principles applied to construction and demolition waste.


The direct and indirect impact of ESG regulations

In addition to these technical standards, attention should also be paid to ESG regulations, which, although mainly targeting large companies because of their greater impact on the environment and society, will also have repercussions on SMEs and other professionals in the real estate sector.

Among the main ESG texts initiated by the EU is Regulation 2019/2088/EU on the publication of sustainability information in the financial services sector, as amended (also known as the Sustainable Finance Disclosure Regulation or "SFDR"), which, barring derogations, will apply to financial market players, including real estate investment funds, from 10 March 2021.

We should also mention Directive 2022/2464/EU on the publication of sustainability information by companies (Corporate Sustainability Reporting Directive or "CSRD"), which has not yet been transposed into Luxembourg national law,[2] which imposes on SMEs and large companies, subject to meeting certain size criteria, the obligation to report in accordance with European sustainability publication standards from the financial year beginning 1 January 2024, or after that date depending on the type of company.[3]

Finally, we should mention draft Directive 2022/0051/COD on Corporate Sustainability Due Diligence (CS3D), currently being adopted by the European Union institutions.[4]

CS3D is a prime example of the induced impact that ESG regulations could have on SMEs and other professionals in the real estate sector. This EU legislation on due diligence seeks to ensure that companies respect minimum human rights and environmental standards throughout their supply chains.

Although mainly aimed at large companies,[5] the CS3D Directive could have a cascade effect on SMEs and other professionals, who are often suppliers or partners of these large companies. Indeed, large companies may require their suppliers and partners to meet certain sustainability standards in order to comply with their own due diligence obligations as imposed by said Directive.

Compliance with the due diligence requirements of the CS3D Directive can represent a significant administrative and financial burden for SMEs and other professionals. In practice, transparency and accountability requirements can require investment in terms of time and resources to maintain business relationships with their customers.

The adoption of ESG practices by SMEs and other professionals can also be driven by factors such as stakeholder pressure, reputational constraints, or easier access to capital and financing, as more and more financiers and investors integrate ESG criteria into their financing or investment decisions.

Faced with ESG regulations, players in the Luxembourg real estate sector are therefore called upon to equip themselves with the relevant information and implement proactive adaptation, whatever their size. It is crucial to understand the extent of the direct and indirect impacts of these regulations on their operations and take strategic measures to ensure their compliance and competitiveness in a market that is constantly evolving towards greater sustainability.


[1] Or draft Regulation 2022/0094/COD and draft Directive 2021/0426/COD.

[2] To be implemented in accordance with the Directive no later than 6 July 2024.

[3] For details of the effective dates according to the type of company, see Article 5 paragraph 2 of the CSRD and Commission Delegated Directive 2023/2775/EU of 17 October 2023 amending Directive 2013/34/EU as regards the adjustment of the size criteria for micro, small, medium-sized and large enterprises and groups.

[4] The final version of the Directive should be adopted and published in the first half of 2024. Member States will then have two years to transpose it into national law, i.e., during 2026.

[5] In the current state of discussions between the institutions of the European Union as of 15 March 2024, the proposed Directive covers any company incorporated under the law of a Member State which has employed an average of more than 1,000 employees and achieved net sales of more than EUR 450 million worldwide during the last financial year for which annual accounts have been or should have been adopted.


By Mario DI STEFANO, Managing Partner - Avocat à la Cour, and Frédéric SEINCE, Associate - Avocat.