Mandatory ESG Reporting Is Likely To Increase, But Forward-Thinking Investors Are Already There

The environmental, social and governance aspects of a real estate asset can no longer be ignored. A property’s ESG performance plays a crucial part in dictating its value and how much a property owner needs to invest to bring it to the standard required, according to Evelyn Partners partner Jason Dunlop.

But how is ESG impacting different asset classes? And what changes should the industry expect in mandatory reporting of climate-related disclosures?

Ahead of the UK ESG Real Estate Agenda event, Bisnow spoke to Dunlop, a panellist, about how his clients’ approach to ESG is evolving. 

Bisnow: How has real estate’s view of ESG changed in the last few years?

Dunlop: ESG is becoming more important for all stakeholders in real estate. Investors, banks, lenders and tenants are all significantly more interested in what their ESG credentials look like, as real estate is often an organisation’s largest asset or investment. 

It’s now deeply entrenched in the investor mindset that assets need strong ESG credentials to attract the right kind of price. We’re also seeing increasing legislation around ESG, the largest area being a building’s energy efficiency, but people are going above and beyond that. They’re hedging the risk of standards getting higher in the future. 

Bisnow: How is this focus on ESG impacting different asset classes?

Dunlop: One of the biggest impacts we've seen is on the office market. Incoming regulations mandate that a commercial property must have an energy performance certificate of C or above by 2028 and B or above by 2030, although these deadlines have been moved. We may hear more about this in the autumn budget.

This has made people realise that secondary or even tertiary office stock needs serious capital investment to make it not just marketable but tenantable. Currently, only 8.3% of London offices will meet the requirement for an EPC of B or above by 2030. 

Existing owners either need to spend money on improving the asset, find a lender willing to lend the capital to carry out improvements or offload the asset, probably at a loss. 

Bisnow: How is this situation impacting financial decisions?

Dunlop: Already, we've seen that many lenders are reluctant to lend against assets that don’t have strong enough ESG credentials and tenants won’t move into a poorly performing building. Usually, people navigate this challenge by demonstrating a plan to improve the asset.

This is often related to energy efficiency, but we’re also seeing property owners focus on the social aspect of ESG. In the residential market, there’s a greater focus on placemaking, dedicating space to the benefit of the community. 

While these measures aren’t necessarily new, it’s about explaining them more coherently as part of a wider ESG strategy.

Bisnow: What do your clients see as the most pressing ESG risks relating to their assets?

Dunlop: Clients still lean towards energy efficiency but are increasingly conscious of the G of ESG. While few organisations are mandatorily required to make climate-related disclosures in their financial statements, we see more clients do this on a voluntary basis.

Evelyn Partners works with clients on this area, preparing and auditing climate-related disclosures and benchmarking this against peers. We also have to prepare our own, as our business meets the criteria to do so. 

Many real estate organisations don’t meet the criteria for mandatory reporting because, whilst they have high balance sheet values, the test is linked to turnover, which will often fall below the current threshold. However, increasingly they want to be seen as doing the right thing. Many have a strong public profile and want to demonstrate to investors and their own clients that they take ESG seriously.

Bisnow: How do you expect this to evolve over the next few years?

Dunlop: There’s general consensus that ESG is only going to become even more important to consider. Mandatory reporting is still in its early stages, and there is increased legislative attention paid to it. 

Increasingly, I suspect we will be asked to support clients with internal audits to appraise risk management processes around ESG. This will consider what clients are doing to monitor environmental risks as well as governance risks. 

We’re likely to see more attention paid to greenwashing, which is still prevalent, as mandatory reporting doesn’t apply to a wide enough community. Responsible investors already pay attention to this, as do large real estate organisations, and certainly the midmarket will have to pay more attention. 

My instinct is that we are going to see a decrease in thresholds for mandatory reporting soon as government objectives grow stronger. 

Bisnow: Is it becoming easier for organisations to gather the data they need to make ESG disclosures?

Dunlop: There’s a growing range of proptech solutions focusing on ESG, particularly on the energy side. We’re also seeing real estate owners install measures to generate their own electricity, for example, using solar arrays and biomass plants. 

There are far more tools available today than a few years ago to help property managers know what they need to do to improve a building. As the legislative environment picks up the pace of change, these tools will be even more important. 

Click here for more on Bisnow’s UK ESG Real Estate Agenda on 3 October.

This article was produced in collaboration between Evelyn Partners and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.