What ESG is supposed to do in real estate

The standard claim, repeated in most textbooks and prospectuses, is that ESG allocation improves financial returns, reduces risk, and produces a positive externality. Three wins from a single decision. Real estate is treated as a particularly good candidate because buildings account for a large share of Swiss national CO₂ emissions. Efficiency gains are assumed to translate directly into both cash flow and impact.

Once you actually look at the numbers, the story is narrower. Looking across the Swiss market, only the "E" shows up clearly: better environmental quality translates into modestly higher operating margins; essentially, efficient buildings cost less to run. The "S" and "G" effects are statistically hard to distinguish from noise. And even the environmental effect only reaches the bottom line (ROIC, ROE) in listed funds, where markets can price operational improvements into valuations. In unlisted vehicles, the same efficiency gains tend to stay buried in the income statement.

So the textbook claim holds, but in a much more specific form: environmental quality only, through operational efficiency, and only when a market exists to capitalise it. That is a useful result, just not the three-wins-for-one story.

Why measurement is the binding constraint

Everything above depends on being able to measure E, S and G consistently. The literature shows that there is room for improvement. Berg, Kölbel and Rigobon (2022) report correlations of 38% to 71% between major ESG rating providers, on the same companies, in the same year. A decomposition of the divergence attributes roughly 56% of the gap to different choices of indicators for the same concept, 38% to scope disagreement, and 6% to methodology.

Real estate does not improve the situation. Running the same Swiss portfolio through three reasonable methodologies yields GHG intensities that differ by more than 30% on a physical quantity. No portfolio ranking or performance attribution is stable to this choice. Every downstream ESG debate inherits this noise.

The ambition–execution gap

The direction of travel is not really up for debate. The Swiss CO₂ Act sets a clear trajectory: building emissions need to fall sharply by 2040, and close to zero by 2050. Most real estate vehicles have adopted matching internal targets. On paper, everyone is aligned.

In practice, the pace of renovation is not keeping up with the pace of the targets. Funds are spending substantially less on retrofits each year than the trajectory would require, and a large share of Swiss vehicles are already behind their own near-term goals. The shortfall, aggregated across the market, runs into tens of billions of francs.

Two things make this gap sticky. First, the renovation market itself is saturated. There are only so many firms that can replace heating systems or upgrade envelopes in a given year, and prices have risen accordingly. Second, the decision of when to renovate is strategic. Move too early and you pay a premium for scarce contractors. Move too late and you are renovating under regulatory pressure, with everyone else, at even worse prices. The best time to act depends on what your peers are doing. This is a clear coordination problem, and no amount of ESG disclosure will solve it on its own.

An allocation bias worth naming

ESG integration, as it is currently practised in real estate debt and equity markets, raises the cost of capital for badly-rated assets. The mechanism is intended: penalise the worst, reward the best. The consequence is less often discussed. The assets that most need capital to transition are precisely those the framework makes expensive to finance. A 1970s envelope in a peripheral canton cannot retrofit itself out of a low ESG rating without access to the capital the rating has now priced out of reach. A well-insulated Minergie building does not require cheap financing to stay efficient.

The net effect is that current ESG mechanisms can concentrate green capital on already-green assets and leave the transition gap to be closed by whoever can bear the higher cost of capital, who are typically not the owners of the worst stock. Any framework that claims to drive transition, rather than screening, has to confront this inversion, and define if investor strategies should lean more into evaluation or impact investing frameworks.

Where measurement is going

The measurement problem is the one constraint that is actually moving. Public building data (construction vintage, energy source, canton, Minergie share, retrofit ratios, accessibility, noise exposure, rent indices) already exists for every Swiss vehicle. It is observable without the cooperation of the fund manager. On top of that, language models can now extract structured ESG information from annual reports in German, French and English with high accuracy on tested criteria. Small language models, which can run on a local machine, seem to be close to matching frontier cloud models on the same task.

The combination matters. Once ESG can be computed from public data alone, it stops being a self-reported disclosure and becomes a continuous, observable signal. Every vehicle is scored, not only the ones with the budget to participate in voluntary frameworks. Measurement ceases to gate analysis. What remains to be debated — the financial mechanism, the execution gap, the allocation bias — becomes the productive part of the conversation.

References

• Alessandrini, F., Jondeau, E. & Delacrétaz, N. (2023). How to measure greenhouse gas emissions in investment property? CRML report.

• Alessandrini, F. et al. (2024). PRESS: The methodology of the Public Real Estate Sustainability Switzerland scores, 2nd edition. CRML report.

• Alessandrini, F., Delacrétaz, N. & Jondeau, E. (2025a). The Building Stock of Swiss Real Estate Investment Vehicles: Characteristics and ES Scores. E4S White Paper, CRML.

• Alessandrini, F., Delacrétaz, N. & Jondeau, E. (2025b). Retrofitting the Future: The Costs, Timelines, and Strategies Shaping Swiss Real Estate. E4S White Paper, CRML.

• Alessandrini, F., Delacrétaz, N. & Jondeau, E. (2026a). From Buildings to Balance Sheets: How Property Quality Creates ESG Value in Real Estate. E4S White Paper, CRML.

• Alessandrini, F., Delacrétaz, N. & Jondeau, E. (2026b). No Surveys Required: Small Language Models Enable Scalable ESG Extraction from Annual Reports. Coming soon — E4S White Paper, CRML.

• Berg, F., Kölbel, J. F. & Rigobon, R. (2022). Aggregate Confusion: The Divergence of ESG Ratings. Review of Finance, 26(6), 1315–1344. https://doi.org/10.1093/rof/rfac033

• Billio, M., Costola, M., Hristova, I., Latino, C. & Pelizzon, L. (2021). Inside the ESG Ratings: (Dis)agreement and Performance. Corporate Social Responsibility and Environmental Management, 28(5), 1426–1445. https://doi.org/10.1002/csr.2177

• Devine, A. & Yönder, E. (2023). Impact of Environmental Investments on Corporate Financial Performance: Decomposing Valuation and Cash Flow Effects. The Journal of Real Estate Finance and Economics, 66(4), 778–805. https://doi.org/10.1007/s11146-021-09872-y

• Fuerst, F. (2015). The Financial Rewards of Sustainability: A Global Performance Study of Real Estate Investment Trusts. SSRN Working Paper 2619434. https://ssrn.com/abstract=2619434

• Jondeau, E. & Pauli, A. (2026). Anticipating the Energy Discount: A Valuation Framework for Real-Estate Investors. E4S Center White Paper, January 2026.

• Kempf, C. & Syz, J. M. (2022). Why pay for sustainable housing? Decomposing the green premium of the residential property market in the Canton of Zurich, Switzerland. SN Business & Economics, 2(11). https://doi.org/10.1007/s43546-022-00346-8

• Salvi, M., Horehájová, A. & Neeser, J. (2010). Der Minergie-Boom unter der Lupe. CCRS, University of Zurich (commissioned by Zürcher Kantonalbank).