GARBE Industrial, a leading developer, provider and manager of logistics, industrial and commercial real estate, has published a whitepaper on the ESG classification of real estate in the defence and security sector in cooperation with the international law firm Baker McKenzie. The study concludes that the relevant European ESG regulations do not provide for blanket exclusions for defence-related tenancies. Instead, these uses are generally treated neutrally, which allows the investability of corresponding properties or funds within the framework of ESG criteria.
Neither the EU Taxonomy nor the Sustainable Finance Disclosure Regulation (SFDR) or the Corporate Sustainability Reporting Directive (CSRD) contain sectoral exclusions for such uses. The ESG assessment primarily focuses on the characteristics of the property itself, as well as the owner's governance and risk management structures. Factors such as energy efficiency, emission values, resource consumption and stringent sustainability management are decisive here.
Tobias Kassner, member of the management board and Head of Research at GARBE Industrial, explains that a modern industrial or logistics property does not automatically lose its ESG capability simply because it is used by a company from the defence or security sector. The quality of the asset, compliance with regulatory requirements and the company's ability to transparently manage potential risks are decisive. The tenant's industry therefore does not represent an independent regulatory assessment criterion.
Differentiation between regulatory permissibility and investor preferences
The study further highlights that regulatory permissibility and actual investability are not always congruent. Mr Kassner notes that defence-related tenants and properties are now established in the regular investment canon. Nevertheless, individual investors and market participants may continue to classify defence-related uses as risky, particularly with regard to feared reputational risks. However, this assessment is being viewed with increasing nuance, and the analysis provides no ESG regulatory justifications for blanket exclusions.
Importance of alternative use
Another central aspect of the study is the alternative use potential of defence-related properties. While highly specialised properties can only be reused to a limited extent after a change of user, standardised industrial and logistics properties offer significantly more flexibility. Dr. Daniel Bork, Partner in Real Estate at Baker McKenzie and co-author of the whitepaper, underlines the relevance of this factor for investors. High alternative use potential reduces potential letting risks and supports the long-term marketability of a property.
It also contributes to the long-term and resource-saving use of properties, which can also be positively assessed from an ESG perspective. The whitepaper clarifies that defence-related uses are neither a general ESG exclusion criterion nor a foregone conclusion for the real estate industry. A well-founded assessment requires simultaneous consideration of regulatory requirements, the expectations of investors and financing partners, and the long-term usability of a property.
