A new study has mapped out global ESG regulations and reporting standards for real estate.
Mapping ESG: A Landscape Review of Certifications, Reporting Frameworks and Practices was led by the European Association for Investors in Non-Listed Real Estate Vehicles (INREV), the Principles for Responsible Investment (PRI) and the Urban Land Institute (ULI), and carried out by PwC with the support of a range of experts from leading real estate fund managers and investors.
The report is intended to provide the industry with a practical guide to navigating the myriad of ESG regulations, standards and certifications around the world.
PRI real estate specialist, Hani Legris said: “No single reporting standard, framework or certificate can cover all the wide-ranging regulatory and stakeholder requirements when it comes to ESG in real estate. Real estate investors face a dizzying array of options and obligations. Whilst the “right” choices will depend on the organisation’s ESG strategy and the jurisdictions they operate in, this report provides essential information to inform the process and is supplemented with case studies, which really helps to bring these topics to life.”
ULI Europe CEO Lisette van Doorn added: “We know that the variety of standards and regulations is bewildering, but it is possible to cut through the noise and accelerate real estate’s progress to net zero. Each organisation needs to choose the standards and metrics appropriate to their ESG strategy and their stakeholders. With this approach, there might well be an opportunity to reduce the ESG reporting burden.”
The report flags new challenges from regulations which are not harmonised and coordinated but which affect the entire industry. This lack of harmonisation and partly undefined legal terms pose a major challenge.
It also provides a number of case studies as well as a set of self-assessment questions to produce greater awareness of the core issues and areas that are anchored in the company’s ESG strategy.
The 14 standards mapped by the report, including ten with metrics specific to real estate, cover the EU, UK, USA, Canada, Hong Kong, Singapore, Japan and Australia.
The report can be downloaded here.
A UK occupier has become the first recipient of an award for consistent clean air.
Enra Specialist Finance is the first organisation to achieve the new AirScore 365 award, from air quality certification company AirRated.
The award reflects Enra’s commitment to continuous indoor air quality monitoring of their workspace within The Hyde, an office building in Watford, and the consistent delivery of a healthy, comfortable and productive working environment over a 12 month period.
Building owner Legal & General Investment Management participates in AirRated benchmarking for 1.25 million sq ft of its UK commercial office space.
Research commissioned by AirRated at the end of 2022 suggests 81% of employees believe that indoor air quality monitoring should be mandatory for all office buildings, while only 21% of UK organisations are committed to indoor air quality monitoring in their buildings.
AirRated uses sensor technology to monitor five key parameters for indoor air quality: humidity, temperature, PM2.5 (fine particles), volatile organic compounds and carbon dioxide.
The real estate industry is wasting time on debating reporting and data auditing instead of acting to improve buildings, claims the head of sustainability for Allianz Real Estate.
“I understand there is a risk of greenwashing, but currently we are wasting too much time with proving we are doing the right things – with debates over reporting, auditable data and standardisation – instead of doing the right things”, Raphael Mertens, chief sustainability officer for Allianz Real Estate, which has €91.3 billion ($98.82 billion) of assets under management, told AsianInvestor magazine.
Time which should be spent on improving buildings’ sustainability was being wasted due to a focus on getting auditable data on emissions, he added, saying that he spent a lot of time talking to regulators and auditors about data harmonisation.
Mertens also said asset owners needed to accelerate tenant engagement if they wanted to achieve their sustainability goals.
Grosvenor has helped 28 small and medium sized companies to commit to Science Based Targets for carbon reduction.
The property company’s UK arm established a free mentoring programme to help suppliers with fewer than 500 employees map and reduce their own carbon footprint. Now 28 firms are on the pathway to recognition by the Science Based Targets initiative SBTi).
They will boost the current total of only 140 UK SMEs which have validated near-term targets with the SBTi. Companies assisted by Grosvenor include architects, building surveyors and contractors, security, recruitment, construction and maintenance firms.
The programme will support the companies in abating an estimated 55,000 tonnes of carbon by 2030.
Victoria Herring, sustainability programme director, Grosvenor, said: “Our SME partners are incredibly supportive of our environmental ambitions, but they don’t have the resources of larger businesses. Transformative partnerships are a key part of our own net zero ambition. And, as a critical part of our supply chain we created this programme to help SMEs on their journey but also to support them in remaining competitive with clients.”
“The response has been fantastic and we’re proud to be contributing significantly to the number of SME’s with Science Based Targets. We’ll be looking at how we can expand the programme to support other parts of our value chain.”
Sam Field, director, Murray Birrell Chartered Surveyors – the first SME from the programme to achieve a validated target - said: “As a busy SME with limited resources and lack of designated qualified manpower in this discipline, Grosvenor’s initiative has enabled us to commence our pathway to achieving net zero.
“The scheme has provided us with the calculation tools, support, and motivation to measure our baseline and to create an action plan for moving forwards towards our target.”
Grosvenor now plans to expand the initiative, most likely to its tenant base. The company has more than 1,000 tenants across its Mayfair and Belgravia estates in London, two-thirds of which are SMEs.
Asset repricing due to the global downturn could be amplified by “brown discounts” for less sustainable buildings in Asia, says M&G Real Estate.
In its latest global outlook report, the UK investment manager said APAC economies are ramping up their commitment to net zero carbon targets, with cities setting targets to decarbonise buildings.
Though the region’s real estate stock is generally newer compared with Western markets, a potential challenge to progress could arise from the fragmentation of property ownership. Strata-titled buildings in multiple ownership are often undermanaged.
Valuations are under pressure in many markets and this could be magnified by investors and occupiers increasing focus on sustainability. In Europe, this has already led to a gap in pricing between sustainable buildings and others.
M&G said the rental premium between green buildings and older assets remains difficult to pinpoint, as green buildings tend to be more modern and would naturally command higher rents.
“However, with increasing focus on ESG by both occupiers and investors, buildings without green credentials are at risk of lower occupancy. Older assets may also be subject to ‘brown’ discounts, amplified by the likelihood of wider repricing,” the report said.
Office buildings with sustainability ratings are achieving substantial sales premiums, MSCI research has found.
Analysis of prices paid by investors for offices in London and Paris shows a premium for buildings with sustainability ratings from organisations such as BREEAM and LEED.
In Paris, the gap began to emerge in 2016 and now stands at 35%, while in London the gap emerged in 2019, but accelerated in the past two quarters and now stands at 25%.
Tom Leahy, head of EMEA real assets research, said: “Our analysis uses a hedonic model which controls for some of the factors which impact office prices — building age and size, submarket location and a general quality component indicated by the price per unit.
“To run the analysis, we introduced a sustainability rating variable into the model, which means we can look at the pricing outturn for similar buildings with and without a rating. This helps address the view that assets with environmental ratings tend to be of better quality, meaning it can be difficult to isolate it as the reason for any perceived outperformance.”
Singapore’s tallest skyscraper will be one of the most sustainable developments in Asia, says architect Skidmore, Owings & Merrill.
The US-headquartered firm today unveiled plans for a new 305 metre tall, 63 floor skyscraper at 8 Shenton Way in Singapore’s CBD, which will be developed by Perennial Holdings.
The mixed-use development will seek Singapore Green Mark Platinum certification, meaning energy use will be 55% below the benchmark standard. The building will use part of the foundations onsite and lower carbon materials such as recycled aggregates, engineered bamboo and terracotta to minimise embodied carbon.
The design features 10,000 square metres of public green space, with planting designed to encourage biodiversity, as well as terraces and sky gardens. It will be directly linked to the Tanjong Pagar MRT station.
8 Shenton Way also incorporates a variety of safety and wellness features, such as contactless technology, antimicrobial materials, enhanced natural air flow and filtration, adaptable interior spaces, and large outdoor spaces.
SOM partner Mustafa Abadan said: "This building will be one of the first post-pandemic mixed-use towers in the world incorporating health and wellness as its primary design drivers. By seeking to achieve the city's newest and most rigorous sustainability standards, our design will establish a new paradigm for resilient and elegant high-rise design in Singapore and beyond."
Real estate sustainability benchmark GRESB has seen substantial growth for its 2022 release, which now covers $6.9 trillion of gross asset value.
Globally, the real estate benchmark grew by 20% in 2022 and covers 150,000 assets (see illustration above).
Average scores across real estate rose one point to 74 for standing investments and two points to 81 for developments. Oceania remains the best-performing region, scoring 82 for standing assets and 88 for developments.
Asia is the next best performing region with an overall score of 78 (2021:75), followed by Europe on 73 (2021: 71). The Americas region average score fell 1 point to 71, however this was due to substantial growth in the region, with 30% of participants taking part for the first time.
“The industry’s embrace of ESG continues to be reflected in our strong participation numbers and increased data coverage, signalling that real assets investors and managers alike remain steadfast in their commitment to sustainability,” said Sebastien Roussotte, CEO of GRESB.
The post-covid recovery in most markets led to a rise in energy use in the 2022 assessment compared with the sharp dip in 2021. However, like-for-like greenhouse gas emissions still fell marginally.
For more information on the GRESB real estate results click here.
Asoka Wöhrmann, chief executive of German investment manager DWS, has resigned after a raid by German police on the company's offices.
Around 50 police officers raided DWS's Frankfurt headquarters on Tuesday as part of an investigation into prospectus fraud.
The manager, which is 80% owned by Deutsche Bank, has been under investigation by the German regulator BaFin since last year, after former head of sustainability Desiree Fixler alleged the company had made misleading statements in its 2020 annual report, which claimed €459 billion of its $900 billion assets under management were invested using ESG criteria.
In 2021, DWS stated that it stood by its annual report disclosures and said: "We firmly reject the allegations being made by a former employee."
However, in its 2021 annual report, published in March, DWS claimed only €115 billion in ESG assets.
DWS has €131 billion of real assets under management, including real estate and infrastructure. It is not known if the investigation is targeting real assets investment products.
Wöhrmann, pictured above, has been replaced by DB executive Stefan Hoops.
Green and sustainability- linked real estate lending is on the increase and is growing in sophistication and impact.
The commitment of banks and larger real estate investors to sustainable finance may even lead to it becoming the norm and non-compliant borrowers facing higher costs.
The terms ‘green loan’ and ‘sustainability-linked loan’ are not interchangeable. A green loan is used for ‘green’ projects: for example borrowing to upgrade the HVAC system of a building to make it more efficient and reduce energy usage.
A sustainability-linked loan, meanwhile, may be used for any purpose, such as to fund general corporate activities or to leverage an acquisition. However, the borrower’s sustainability performance over the life of the loan is measured against various key performance indicators (KPIs).
Borrowers receive interest rate discounts if they hit targets and receive penalties or are considered in default if they miss them. It is difficult to get a picture of how much green and sustainability-linked finance is being extended in real estate globally, as practices vary, but there is no doubt it is growing.
Tom Brook, director, debt and structured finance, international capital markets EMEA, at JLL, says: “Last year JLL Debt Advisory transacted c$9.6 billion of financing across Europe of which $1.7 billion (18%) was either sustainably linked or was for assets with leading sustainability credentials.
“However, of the $4.1 billion of financings we have closed in Q1 of this year, $1.25 billion (30%) has been either sustainably linked or for assets with leading sustainability credentials, which demonstrates how this is becoming an increasingly important focus for the industry.”
From a lender’s point of view, the motivation for sustainable lending is to lower risk. Meeting sustainability targets should make a company or an asset more resilient to climate change and other factors, thus lowering the risk of financing them.
Gregor Bamert, head of real estate debt at Aviva Investors, which has allocated £1 billion ($1.3 billion) to sustainable real estate lending, says: “We are investing internal and external capital and need to be able to say there has been a positive economic outcome as a result of us reducing the margin. It is not just about doing something good. We can say that the measures taken future-proof the building and make it more attractive, thus reducing the exit risk of the loan.
“That means the lower margin has been offset by a reduction in risk. Being able to demonstrate the alignment between risk and reward is how you unlock capital.”
Jonathan Drew, managing director, sustainable finance, at HSBC, says: “HSBC recognises real estate has a crucial role to play in addressing the sustainability challenge and we want to contribute by directing capital into sectors and activities aligned to the broader objectives of the transition process. In real estate, the winners will be those whose buildings are resilient and connected to and contribute to their communities. so on a long- term risk-adjusted return basis, it is the smart place to put capital to work.”
Much of the early sustainability-linked lending was in the form of green bonds issued by listed companies and many sustainability-linked loans have been extended to companies rather than their assets. However, sustainable private lending to real estate assets is growing and Aviva has opted for the sustainability- linked rather than the green route, although it may well extend green loans in future.
Bamert says: “Firstly, most of our lending is on existing assets and secondly, while there are great things happening in new developments, if we’re not going to fix the existing assets, then we’re really not going to move the dial in a big way.”
The motivation for borrowers is twofold: sustainable financing can help them meet their sustainability targets, and can also help them secure cheaper financing. However, in a world in which margins on real estate finance in developed markets is very tight, the discounts amount to a few basis points, which is unlikely to move the needle.
Brook says: “Typically where loans have sustainability linked key performance indicators (KPIs) a margin ratchet, either reduction or penalty, is applied of between 2bps and 20bps.”
Gavin Eustace, co-founder of boutique UK residential development lender Silbury Finance says meeting sustainable loan requirements “typically leads to a saving of around 20 basis points on the exit cost”.
Hong Kong’s Link REIT is the largest real estate investment trust in Asia, and owns assets in Hong Kong, mainland China, the UK and Australia. It issued its first green bond in 2016, raising $500 million at a fixed rate of 2.875%, which it says was one of the lowest rates achieved by a Hong Kong corporate. A HK$4 billion ($512 million) convertible bond followed in 2019, with a 1.6% coupon.
It has secured several sustainability-linked loans, in sterling, Hong Kong and Australian dollars, but this year announced a HK$12 billion ($1.54 billion) sustainability-linked loan from a consortium of 16 banks.
Kok Siong Ng, chief financial officer of Link REIT, says: “Seeking sustainability-linked financing is a way for us to pursue ongoing improvement in our ESG performance. The financial incentives serve to motivate ESG performance and the subsequent mandatory robust auditing process ensures that greenwashing is minimised. This also helps to set an example for our business partners and other organisations across our value chain to follow so that we augment sustainability efforts and overall impact.”
It is also open to question how material green and sustainability- linked lending is for borrowers. However, as sustainability becomes central in real estate, market players expect the split between the best and laggards to become clearer.
Link REIT’s Ng concurs: “Clearly the greener and more sustainable real estate companies will have more diversified sources of funding from investors and the credit community compared to underperforming companies and assets.
“Underperforming buildings will likely increasingly fall behind the market needs and brown discounts will become more real and material over time. Likewise, those real estate companies which fail to embrace and implement ESG effectively will likely face higher cost of capital and a reduced pool of potential investors.”
The full version of this article can be found in Sustain’s May issue.
