Asset owners should be implementing clear decarbonization and resilience strategies, despite economic headwinds, JLL says.
The broker’s The commercial case for making buildings more sustainable report argues that climate risk, occupier and investor demand and regulation make sustainability investments “the smart decision for longer-term performance”.
The report highlights three reasons for making sustainability investments. Firstly, mounting costs from climate risks, including heatwaves, flooding, storms and droughts, are increasingly impacting urban areas, with significant implications for building owners.
Events such storms, wildfires, hurricanes, flooding, droughts and freezes, have cost $612 billion in the last five years in the US alone. Meanwhile, more than 350 cities have peak summer temperatures above 35°C. An estimated 970 cities will suffer such heatwaves by 2050.
Research by JLL and Munich Re shows that cities in Asia and the US sunbelt have the highest climate risk at present (see above).
Secondly, sustainability measures are also supported by demand from occupiers and their employees. JLL points to a rental premium for green certified office stock of 11.6% in London, 9.9% across Asia and 7.1% in North America.
JLL also points to a global undersupply of green buildings, with an estimated 75% of demand for such properties unmet in the US, for example. In Europe and Asia, less than half of demand for green office space is met with supply.
Finally, asset owners are at risk of difficulties with financing, regulation and insurance if their buildings fail to meet appropriate standards. Both Europe and the US have released major corporate climate disclosure regulations in the past 18 months and the regulatory burden is set to increase.
An increasing weight of regulation is also coming at city level, with cities such as New York and London introducing their own measures to reduce emissions from the built environment.
The JLL report suggests a number of measures, including energy-efficiency retrofitting, adapting building design and on-site clean energy generation, to make portfolios more resilient.
European real estate companies are more focused than ever on ESG, but are feeling pressure from a difficult business environment.
The latest Emerging Trends Europe report from the Urban Land Institute and PwC found that nine out of 10 survey respondents believed ESG issues would have the biggest impact on real estate by 2050.
However, interviews with investors, developers, managers and advisers indicated market participants were struggling to fulfil ESG compliance at a difficult time of high interest rates and construction costs, alongside other competing demands on their finances. “If you go into recession, ESG becomes a harder sell,” one global private investor said.
For the third year running, new energy infrastructure such as wind, solar PV and geothermal, was identified as the sector offering the greatest overall prospects for investment, development and rental growth.
The survey also found that ESG would be the number one driver of investment decision-making, followed by changing customer demands and demographic shifts. However, some investors complained that the regulatory environment forced a focus on box-ticking rather than concrete action.
“Reputational upkeep plays a part, but it’s often less about greening your portfolio and more about meeting all the reporting requirements, which takes a lot of energy and time,” said one institutional investor.
The survey revealed that pressure from institutional investors (cited by 71%), lenders (67%) and occupiers (56%) would most likely accelerate the implementation of ESG measures.
Frustrated professionals are finding flaws, too, in present and incoming legislation, the report says. “EU taxonomy monitoring purely looks at energy consumed during building use, rather than primary energy used to construct a building. So, we’re missing the bigger picture,” an asset manager told the survey.
KanAm Grund Group has created a new ESG Strategy department and promoted Manuel Hein to run it.
The German fund manager said it had merged its Sustainability & Analysis and Sustainable Asset Strategy groups to form the new department. Hein, who previously led the Sustainable Asset Strategy is now responsible for all internal ESG measures, both from a regulatory perspective and at property level.
Jan Jescow Stoehr, managing director at KanAm, said: "The ESG Strategy department plays a central role in our organisation. By merging the previous departments, we will be able to make our processes and activities in the area of sustainability even more efficient and transparent in the future. This will enable us to better meet the growing requirements and potential of the market and our investors."
KanAm has €7.09 billion ($7.73 billion) of real estate assets under management, including The Nexus, a 10,000 sq m Berlin office building (pictured above).
A new survey from Deloitte has found that less than half India's companies felt adequately equipped to meet their ESG strategy and compliance requirements, with real estate firms performing even worse.
Only 25% of companies in the real estate and construction sectors said they were "well aware" of the existing ESG reporting mechanisms and regulations in India.
The Securities and Exchange Board of India (Sebi) has mandated Business Responsibility and Sustainability Report (BRSR) disclosure for the top 1,000 listed organisations by market capitalisation from the 2022-23 financial year.
Further down the corporate food chain, awareness of ESG is even more limited. Only 15% of the companies surveyed said their suppliers were well equipped to deal with their ESG requirements and 18% reported suppliers to be totally unprepared.
Meanwhile, three-quarters of respondents said India's ESG regulations were too complex and that guidance on compliance was lacking.
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.
German investment managers are worried about the risk of "stranded assets", which do not conform to ESG regulations.
A survey carried out for consultants Aurepa Advisors AG and PwC Deutschland found that 65% of respondents saw a significant risk that older buildings in a portfolio will fall into energy efficiency category F or worse (EU energy performance ratings for buildings rank from A to G). According to 38% of respondents, non-ESG-compliant properties are already more difficult to finance.
Hannes Eckstein, founding partner of the Aurelius real estate group and board member of Aurepa, said: “Many properties are in danger of becoming stranded assets because of a lack of an appropriate asset management strategy.
“However, a large proportion of older buildings across all asset classes can be transformed into energy efficient properties. Every property must be looked at individually to establish which refurbishment projects will contribute to their long-term value enhancement.”
The survey found that 57% of respondents believe the greatest pressure to make properties ESG-compliant comes from regulatory requirements. Meanwhile 36% said pressure came from mainly from within their own company, while only 7% reported pressure from investors.
More than a quarter of asset managers surveyed have portfolios where at least half the assets are non-ESG-compliant properties (see chart above).
There are different strategies for dealing with these properties; 46% said they would refurbish, 25% would sell and 13% demolish and redevelop.
Meanwhile, only 57% of respondents have agreed green leases with their tenants. Thorsten Schnieders, partner at PwC Deutschland, said: “It is not only asset management activities which are essential for the leverage of value creation potential. The occupiers must also take responsibility for conserving energy. Green leases are an effective tool for this but are unfortunately still something of a rarity.”
The anonymous online survey covered managers with aggregate of assets under management of €100 billion.
Investor interest in environmentally sustainable real estate assets is soaring. According to one source at a large global property consultancy, his business has recently witnessed an 800% uptick in enquiries for ESG real estate investment opportunities.
The problem is that as things stand there are not many real estate funds that are being marketed as environmentally sustainable. Given the pent-up investor appetite for this type of product, why is there such a disconnect between supply and demand?
In Europe, funds are classified using EU Sustainable Finance Disclosure Regulation (SFDR), which was introduced in 2021 to improve transparency in the sustainable investment market. Article 9 funds – also known as ‘dark green’ funds – have sustainable investment or a reduction in carbon emissions as an objective. Article 9 funds also have to assess their portfolio against the principle of ‘do no significant harm’ by considering principal adverse impact (PAI) indicators. These indicators are defined as “negative, material or likely to be material effects on sustainability factors”.
As things stand, there are only a handful of real estate funds in Europe that qualify as Article 9. Bridges Fund Management recently raised £350m – £50m more than its original target – for an Article 9 fund focused on assets in alternative and needs-driven sectors, such as low-carbon logistics, healthcare and lower-cost housing. There is also an Article 9 fund set up by a global investment manager focused purely on the living sector in Germany.
The latest fund badged environmentally sustainable was launched by Fiera Real Estate in June. Although the fund does not technically qualify under Article 9 because its structure was created before the SFDR legislation came into being, its criteria is aligned with Article 9.
“In our recently launched logistics sector-focused fund, we will be targeting net-zero construction for all projects,as well as market-leading ESG credentials within the design,” says Charles Allen, head of UK real estate at Fiera. “This not only satisfies growing expectations from the investment community and our internal net-zero carbon ambitions, but it also serves as an indication as to where we believe the market is headed.”
The market may well be heading in that direction, but the problem is that while the SFDR system was introduced to give greater clarity and transparency to investors seeking sustainable investment opportunities, it only appears to have muddied the water.
“In attempting to clarify matters, more confusion has actually been created over the definition of a ‘sustainable private real estate fund’ as it is open to interpretation,” says Jane Boyle, sustainability director at JLL. “Article 8 funds are those that have an E or S characteristic. Whilst this is quite vague, it could include things like a year-on-year energy or carbon target, that is not aligned to SBTis [Science Based Targets initiative], or non- specific targets.
“In contrast, article 9 funds have sustainable investment objectives (SIO), which could include aligning with the Paris Agreement, such as net zero carbon funds with a social objective. It’s open to interpretation whether some funds being marketed as Article 9 adhere to the definitions.” Another issue is that to qualify as an Article 9 fund, undercthe wording of the regulatory technical standard 100% of the fund’s assets must be sustainable from the outset.
“That means that those funds that are transition funds and aren’t sustainable at the moment, but their purpose is to transition assets to be sustainable, don’t qualify as Article 9, which given the vast majority of assets in places like the European Union, and obviously the UK, are old and energy inefficient, is problematic,” says Robbie Epsom, EMEA head of ESG at CBRE Investment Management.
Ali Ingram, head of sustainability, capital markets, EMEA, at JLL, agrees with Epsom’s assessment that better definitions are needed globally that can be understood by everyone as this will encourage asset owners – and particularly those who own existing assets – to improve the sustainability of their portfolios and at the same time eradicate any possibility of greenwashing.
“Ultimately, we need a clear and defined global and legal definition of a transition fund/brown-to- green if we are going to help LPs and therefore capital flows identify the real players in the space and encourage more of these types of funds,” says Ingram. “I believe that the greenest fund out there is in fact a transition fund looking to acquire assets not yet on net-zero carbon pathway and implement net-zero carbon strategies, versus a fund which invests in existing green assets.”
The industry is collectively trying to address the challenges highlighted by Epsom and Ingram, with property investors and investment bodies such as INREV meeting with organisations including the FCA and the Task Force on Climate-Related Financial Disclosures to discuss what environmental metrics and regulatory framework the real estate sector should work towards.
As John Forbes from John Forbes Consulting, which advises real estate investment managers, investors and others in the real estate industry, puts it: “I guess the big question for investors is does the future lie with specialist funds with an ESG focus building the swankiest, greenest, exemplar new buildings, or does it rest with the majority of the funds who will own the majority of the [existing] assets raising their ESG bar to cope with the pathway to net zero?”
The EU’s Sustainable Disclosure Regulation (SFDR) is so far the only regulatory regime to define different levels of sustainability within investment funds. The regulation aims to create a more transparent playing field, partly to prevent greenwashing – where some financial firms claim that their products are sustainable when they are not.
The Accounting and Corporate Regulatory Authority and Singapore Exchange Regulation have set up a Sustainability Reporting Advisory Committee to advise on creating a sustainability reporting roadmap for Singapore-incorporated companies.
The committee is chaired by Esther An, chief sustainability officer of City Developments Ltd, and brings together a range of sustainability experts, investors and other stakeholders.
An said: “Effective ESG integration and disclosure are critical to accelerating global efforts to build a greener and more resilient future for all. I am honoured and humbled to be appointed this important role and I look forward to working with fellow committee members who are respected leaders in their fields.”
In March, the SEC proposed rule changes which would oblige listed companies to produce a range of climate-related disclosures (see below), including greenhouse gas emissions.
The proposed rules are open to public comment until 20 May.
If finalised, the proposal would become the first-ever rule requiring all companies registered with the SEC to report, measure and quantify material risks related to climate change in their registration statements and periodic filings.
SEC chair, Gary Gensler, added: “Investors representing literally tens of trillions of dollars support climate-related disclosures because they recognise that climate risks can pose significant financial risks to companies and investors need reliable information about climate risks to make informed investment decisions. Companies and investors alike would benefit from the clear rules of the road proposed.”
The SEC measures are in line with the European Union requirements of the Sustainable Finance Disclosure Regulation and the EU Taxonomy, which provides a common language regarding environmentally sustainable activities. If the proposals are finalised, they will effectively merge climate-risk reporting into a company’s financial disclosures.
Around a third of US public companies include some information about climate-related risks. Real estate companies are expected to be substantially affected by the new regulations, both with regard to their own reporting and also the disclosures required by their tenants.
US REITs have tended to be ahead of the curve on climate risk reporting, but developers and smaller listed entities are more likely to need a dramatic reporting upgrade.
One proposed requirement is that companies would need to assess the risk of events such as flooding, heatwaves or wildfires. However, aside from flooding risk, there is no standardisation in this reporting. If the proposals are ratified, more standardisation is expected to emerge.
A report from law firm White & Case notes that the proposals in many instances go beyond what listed companies are already voluntarily disclosing and says: “Given the scope and complexity of the proposed rules, comments are expected to be extensive, and there will likely be threats of litigation if the proposed rules are adopted.”
Indeed, the proposal is opposed by SEC commissioner Hester Peirce, who argued that existing reporting rules already required the disclosure of material climate risks, that it requires disclosure which is outside the SEC’s remit and that the cost of compliance has not been properly estimated.
The measures have elicited broad support from larger real estate organisations. “For long- term, meaningful action to occur, there needs to be consistency in reporting and data,” says JLL sustainability vice president Cynthia Curtis. “Then, it elevates
it more closely to the financial reporting and puts the topic smack in the middle of boardrooms and finance departments. And that’s an excellent thing.”
Matt Ellis, chief executive of proptech firm Measurabl, says the disclosures would be “a bold step toward regulating an area that has largely remained unregulated for too long”.
The new rules will require US listed companies to make a number of regular disclosures, which vary depending on the size of the company; smaller companies have more time to comply. The rules require disclosure of:
The full version of this article appears in the May issue of Sustain
