Legal development

Lessons in social impact investing from Italy

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    The appetite for ESG-related investments in Italy is growing significantly as the country emerges from the social and economic crisis caused by the COVID-19 pandemic. Among institutional investors, we are seeing a high appetite for ESG, with the vast majority of asset and fund managers adopting policies that enshrine ESG commitments, and devoting significant portions of their funds to ESG investments. 

    More generally, the ESG agenda has played a major positive role in the Italian government’s early response to the pandemic’s economic impact when it expanded its system of tax credits to encourage energy efficiency investments in real estate. Initially introduced in 2007 as the ‘EcoBonus’ scheme – which allowed between 50 and 65% tax credits depending on the kind of renovation work undertaken and the energy efficiencies achieved and, in this way, attracted over €42bn in investments to date – the government updated it in 2020, and increased the amount of tax credits that investors can claim back for making energy efficiency investments to 110%.

    Investors are clearly attracted by the opportunity to offset capital expenditure costs for the building work they undertake, and by the ongoing economic benefits of a more energy-efficient real estate asset. Very real reductions can be made in the amount of energy needed– as much as 75% – for cooling, heating and for hot water consumption, which can result in significant cost savings. 

    The impetus for greater energy efficiency is also being driven by the global energy crisis, made significantly more pressing by the conflict taking place in Ukraine. Energy costs had already been rising, but that trend has accelerated, along with an increase in the cost of materials and significant delays in their delivery. This is having a major impact on the financial viability of business plans, which could impact the pipeline of developments in the short to medium term. 

    Within the rental market, ESG considerations are now becoming standard market practice in lease negotiations, with landlords and general investors insisting that leases with tenants include specific clauses and duties of cooperation to report how they treat waste, about diversity in the office, about wellbeing, and other topics that impact social sustainability. 

    Where KPIs are being agreed, third party independent evaluators are increasingly being used to carry out independent due diligence to identify whether KPIs are being met. Similarly, in the sale and purchase of real estate assets, obligations are now in place for the seller to certify the relative energy efficiency of the building asset. To me, this is a clear sign of the robustness of ESG commitments and it signals that we are now in a new era of accountability. It is no longer just a matter of paying lip-service to the green agenda. 

    More needs to be done, however, to bring the whole of the Italian real estate sector into a more energy efficient future. Like many European countries, there is a two-speed system at play where the very biggest cities – such as Milan and Rome – attract more investments and stimulus than the second-tier cities and towns, where inward investments are less easy to attract. 

    Although it is now commonly accepted that a focus on ESG issues brings about significant economic and social improvements – in terms of energy efficiency, the impact on the environment, the improvement in quality of living, and increasing the attraction of locations to students, young people, or workers – there is still much to be done to expand these benefits into the majority of the country’s smaller towns and cities. 

    Institutional investors have the opportunity lead the way in Italy. They can be the anchors, the catalysts and the positive protagonists, kick-starting the renovation process one building at a time, and gradually impacting wider areas of a town or city. In cooperation with municipalities, institutional investors can bring about significant urban regeneration, creating social infrastructure that benefits a much wider area. This is an ongoing process that has been given a major boost with the governments use of tax credits. 

    Italy is attracting more overseas investment, and this is reflected in new kinds of real estate assets, such as live/work developments and older living and student accommodation. Slowly but surely, we are embracing new ways to live in cities in a more green and environmentally-friendly way.

    This article was co-written by Andrea Caputo and Matteo Sortino.