The IVSC has issued this Perspectives Paper as the third in a series designed to initiate discussion and debate on the topic of ESG. Specifically, this paper will focus on Environmental factors that relate to real estate valuations, an example of which is sustainability which is one of many subcomponents of the E in ESG. More specifically, this paper will focus on valuations of existing real estate.
Environmental, Social, and Governance (ESG) are criteria increasingly used to assess the impact of the environmental, social and ethical practices of companies on their operations, financial performance and attractiveness to investors. The three components; Environmental, Social and Governance which are metrics considered to evidence effective performance, reach beyond the individual organization out to the wider markets, society and world as a whole.
While it is very frequent to have ESG criteria assessed and measured from a company’s perspective, they should also be considered from a tangible asset’s perspective as the ESG principles affect not only the behaviour of owners and operators of assets, but also other matters related to the physical properties themselves, such as energy efficiency.
Whilst the two prior perspectives papers considered ESG from a business and intangible perspective, this third Perspective Paper explores how ESG can be quantified within valuations of real estate assets. The relationship of ESG to proposed/under construction real estate is a distinct topic and is not discussed in detail in this perspectives paper.
This perspective paper will not, in the main refer to the Social and Governance aspects of ESG as these, whilst still relevant to a range of tangible assets, are less developed considerations in real estate valuation. The IVSC TAB consider ESG to be a fluid, developing topic and future perspective papers may consider these elements further.
Consequently, capital flows will be increasingly channeled into sustainable economic activities in the future meaning ESG will play an important role in corporate decisions. In a recent report issued by Morgan Stanley Capital International (MSCI) on Investment Insights 2021 a global survey was taken amongst sovereign wealth funds, insurers, endowments / foundations and pension funds on ESG considerations. Over 73 percent of those surveyed planned to significantly or moderately increase their investment allocation in ESG-friendly assets by the end of 2021 with a further 36 percent seeing the “social” aspect as a larger proportion of the mix by the end of 2021.