The global drive to advance sustainability is creating considerable uncertainty in the investment market for real estate, according to a new report by Colliers EMEA. The report, ‘ESG: A Tipping Point’, points to an urgent need for policymakers to agree on pragmatic, actionable targets that will support the creation of clear, consistent technical standards and benchmarks enabling the reallocation of both capital and skills as investors rush to factor new ESG realities into decision-making.
The report highlights the fact that no one set of reporting frameworks has established itself as the accepted worldwide benchmark for ESG performance, making it very challenging for real estate investors to predict future requirements and liabilities. “The challenge at the moment is to understand what, exactly, needs to be done to calibrate property portfolios with the incoming requirements for decarbonisation in particular,” said Luke Dawson, Managing Director, Cross Border Capital Markets, EMEA at Colliers.
A particular source of anxiety is the massive potential cost of retrofitting existing buildings to comply with ESG requirements. The report estimates that this could be in the region of €7 trillion in Europe.
“This retrofitting cost challenge needs to be spread over the next 25 years if we are to aim to hit Net Zero, but to put this in context, it equates to the typical annual volume of investment activity in Europe – around €300 billion. It remains to be seen who will pick up or share the tab for these enormous retrofitting costs – investors, owners, governments or society as a whole,” noted Damian Harrington, Director and Head of Research EMEA, and Head of Capital Markets Research Global at Colliers. “But what is already clear is that the transition will create a wide array of obligations and new investment opportunities in effectively mandating the upgrading of properties worldwide.”
While the EU’s Sustainable Finance Disclosure Regulation (SFDR) was enacted this year, having a direct impact on the investment world, the report notes that emerging regulations such as the EU’s Corporate Sustainability Reporting Directive (CSRD), are poised to provide both greater clarity and new challenges. The CSRD is expected to come into force in 2023 and is initially geared to a company’s size, but nearly all commercial real estate companies will be expected to comply with it.
These standards will mean that landlords will need to understand what their occupiers are doing within their rented spaces – something the report notes could prove especially challenging for big-box units hosting confidential industrial processes or data repositories. “Educating boards about the new responsibilities arising from emerging regulations will be a vital part of the transition,” said Andy Hay, Managing Director, Property Management, EMEA at Colliers. “There will also be an increasing premium placed on ESG expertise, with more companies moving to hire specialists or seeking partnerships that boost their capabilities in this area.”
According to the report, a raft of adjustments will be required as disclosure metrics and reporting frameworks are formalised over the next couple of years, leading to a potential slowdown in transaction activity as investors come to terms with new norms. In this period, the ‘G’ will be the most important element of ESG, as corporate governance adapts in terms of culture, policy, systems, risk and control.
“While the details of how emerging standards will impact specific property assets may not yet be apparent, the extent of change required means a strict ‘wait-and-see’ approach will not be feasible,” added Andy. “It’s important that investors begin to respond now, by enhancing their understanding of ESG’s potential role in their portfolios and securing the necessary talent and partnerships.”
According to the report, the main areas of priority for investors should include:
Making a board-level commitment to ESG and giving it a permanent place on the agenda, backed by training for all staff
Evaluating the organisation’s ability to deal with new regulatory challenges across the value chain
Assessing the ability of systems to capture and process the more detailed ESG data likely to be required by emerging standards
Building capacity to evaluate ESG-related risks and strengthening audit controls
Environmental, Social, and Governance (ESG) represent important challenges and opportunities of our time. ESG is a value driver, as investors increasingly apply these factors to identify future risks and...