Redefining Value

Redefining Value- How ESG is changing the definition of value in real estate

Last month I was invited to the UC Davis Energy Affiliates Forum to sit on a panel discussing the trends and outlook for sustainability and energy resources. Amongst many topics the panel discussed, I was particularly interested in how Environmental Social Governance (ESG) measurement and reporting are changing how the real estate industry defines value.  

PWC recently highlighted the five megatrends that are having a direct and meaningful impact on the real estate market and buildings.  The two which were the key concerns for BRE’s customers are Rapid Urbanization and Climate Change.

Although it’s fairly widely known, it’s worth reiterating that cities consume 75% of the world’s natural resources and account for 80% of global greenhouse gas emissions.  Buildings on their own account for 40% of carbon emissions.  The growth of cities within our lifetimes has been incredible.  Shenzhen in China is a perfect example.  Forty years ago, it was a fishing village and today it is a city of 12 million people.  At BRE, we are spending a lot of time advising Governments and other customers on the development of “Smart Cities” and how we can continue to urbanize with less impact.

Climate change is the defining issue of our time.  As the World Health Organization has pointed out, climate change impacts everyone everywhere.  While those living in poverty, countries with weak health systems and children are the most vulnerable, no part of the world is immune and we are seeing more and more climate related impacts and risks.  California, the world’s fifth largest economy and one of the wealthiest states in the U.S., has seen the impacts of climate changes first hand.  Today’s fire season in the western United States starts earlier, lasts longer and is more intense than in the last several decades.  California suffered a prolonged drought that dramatically increased the risk of fire.  Pacific Gas & Electric (PG&E), the largest utility in California, has filed for bankruptcy in the face of potential liabilities of $30 billion or more resulting from wildfires in their service area in 2017 and 2018.  The economic costs have been significant and will continue to impact heavily, including lower property values, infrastructure and ecosystem repairs, lost business and tourism revenue and increased insurance premiums. The company and many analysts are describing this as the first “climate change” bankruptcy and the risks aren’t just with utility companies – the U.S. federal government’s National Climate Assessment is clear that;

“Without substantial and sustained global mitigation and regional adaptation efforts, climate change is expected to cause growing losses to American infrastructure and property and impede the rate of economic growth over this century.”

It’s within this context that the UN’s Sustainable Development Goal 11 for Sustainable Cities and Communities becomes a crucial area of focus with delivery of sustainable buildings a key objective for real estate.  Global real estate investors and occupiers are responding to these macro issues and the measurement of Environmental Social Governance (ESG) indicators has become a real driving force in the market.  Markets now want to have not only traditional financial metrics but also non-financial metrics such as climate resilience (through the TCFD implementation), carbon emissions, responsible investment strategies and well-being.  Investors, many of whom are pension funds, are now taking a much more holistic view when it comes to deciding where to put the money – they want that investment to contribute to wider society as well as a return to them as the owners of capital.  Banks are increasingly recognizing the importance of sustainability in protecting against obsolescence and value loss, seeking to reduce risks for both borrowers and lenders alike.  Many investors are now signatories to UNPRI which defines responsible investment as an approach that aims to incorporate ESG factors into investment decisions. 1,750 signatories in 50 countries representing $70 trillion of assets.

Technology is playing a major role in ensuring that societal, environmental and financial factors are no longer examined in isolation.  Huge amounts of data now sourced from individuals via smart phones, wearables, as well as in infrastructure via smart buildings and Building Information Modelling (BIM).  However, data has to be translated into information which can be acted on.

Benchmarks such as BREEAM are giving investors the information to make better decisions and the expectation towards certified ESG performance with the same rigor as financial data will continue to grow.  Certification is increasingly seen as a risk assessment and mitigation practice – understanding the performance and communicating it transparently allows the risks to be managed.  Global investors want global benchmarks in order to understand how their buildings performance in a global context.  BREEAM’s basis in sound science along with independent and objective assessments through certified third parties helps clients, investors and other stakeholders to understand and mitigate the risks.  BREEAM’s adaption of it’s standards to local context while upholding the rigor and credibility offers an opportunity to compare performance of assets anywhere in the world.  BREEAM’s global success – 2.2 million+ buildings registered, 560,000+ certificates issued, 81 countries – sets it as the trusted benchmark and certification program for sustainability around the world.

The next five years will be a pivotal period for the industry, the challenges going much deeper than the conventional supply/demand dynamics of real estate, or even a market downturn. The days of buying real estate, holding it for 20 years and doing nothing, are long gone – climate change is forcing real estate to redefine value and more actively manage assets and portfolios.  We have to make sure our buildings are flexible enough to cope with whatever is coming in 10 years’ time.  The use of global benchmarks to measure and report sustainability performance are crucial to addressing climate change and ensuring that the communities we are growing and living in today are ready for whatever the future brings.

Authored by Alan Somerville, Executive Director of the Building Performance Group at BRE