ESG is at the top of major issues transforming the real estate investment industry in Europe. In recent years, both investors and investment managers have dramatically increased their efforts to integrate ESG principles into real estate assets and portfolios and the trend is only expected to continue as serious efforts are made to support achievement of the Paris Climate Accord goals adopted in 2015.
Aided by GRESB, CRREM and other real estate-focused initiatives, specific criteria have been developed to measure and therefore enable comparison to assess levels of sustainability at the asset and vehicle level annually, while progress can also be tracked over time. Growing awareness of climate change and support for decarbonisation have not been limited to the private sector, however. With the aim to achieve real progress toward limiting global warming and transition to a net carbon zero economy and society by 2050, policy makers have taken steps to set standards for the measurement and reporting of sustainability-related aspects of financial products, including real estate investments.
Sustainable Finance and SFDR
In the EU, the Sustainable Finance Taxonomy and Sustainable Finance Disclosure Regulation (SFDR) are transforming the way real estate and other investment sectors are addressing ESG. Both complex and still evolving, these initiatives are establishing common standards for assessing and labeling “green” financial products in an attempt to avoid “greenwashing”. At the same time, these standards are designed to give investors more insight into the ambitions and success of ESG measures in green products. Under SFDR, “Article 6”, “Article 8” and “Article 9” funds have quickly entered our industry vocabulary.
While “Article 6” investment products do not include measures to promote sustainability, “Article 8” funds are eligible for sustainability labelling as they promote “environmental or social characteristics, or a combination of those characteristics, provided that the companies in which the investments are made follow good governance practices.” Going further, “Article 9” funds are investment products that have “sustainable investment as its objective and an index has been designated as a reference benchmark.” Rigorous criteria have been established for demonstrating that these requirements are met, although unfortunately these criteria are not necessarily a very good fit for real estate, which clearly points to the need for more clarity.
Climate change risk
These are not the only policy initiatives the real estate industry needs to be aware of, however. In response to policy makers’ increasing concerns about the risk climate change poses to asset values held by insurers, pension funds, and investment funds due to risk of floods, fire and extreme weather, climate change risk will now also need to be assessed and reported under requirements being added to regulations affecting our sector, including AIFMD, MiFID II and UCITS.
UK striking an independent course
Since leaving the EU on 1 January 2021, the UK is no longer subject to EU rules. While many pre-existing EU rules have been embedded into UK law and will remain unless changed or amended, new EU regulatory developments in the field of sustainability do not automatically apply. The UK is considering the approach that it prefers to take to ensure appropriate assessment and disclosure of sustainability related measures. A recent FCA consultation on climate-change reporting to gather public input on a number of preliminary proposals and legislative proposals is expected to result in more concrete standards in the fairly near term.
Regulatory measures addressing sustainability, decarbonisation and climate change are likely to only increase as the importance and urgency of action are no longer disputable. The real estate investment industry is ready to do its share within a framework of clear and relevant regulatory and industry standards.
This regulatory update is just one of the ways that INREV supports its members in engaging with the ESG agenda. To learn more visit the ESG page on our website.