The Growing Importance of ESG in Real Estate: Insights from Jason Dunlop of Evelyn Partners
In recent years, the environmental, social, and governance (ESG) aspects of real estate have transitioned from being mere buzzwords to essential components of property valuation and investment strategy. As Jason Dunlop, a partner at Evelyn Partners, articulates, the ESG performance of a property is now a critical factor influencing its market value and the necessary investments to meet evolving standards. This article delves into the implications of ESG on various asset classes, the anticipated changes in mandatory climate-related disclosures, and the evolving mindset of real estate stakeholders.
The Shift in Perspective on ESG
The perception of ESG within the real estate sector has undergone a significant transformation. Stakeholders—including investors, banks, lenders, and tenants—are increasingly prioritizing ESG credentials. This shift is particularly pronounced because real estate often represents an organization’s largest asset or investment. Dunlop notes that strong ESG credentials are now integral to attracting favorable pricing for assets. Moreover, the landscape is evolving with increasing legislation focused on energy efficiency and sustainability, prompting stakeholders to proactively address potential future standards.
Impact on Different Asset Classes
Among the various asset classes, the office market has felt the most pronounced impact from the ESG focus. New regulations require commercial properties to achieve a minimum energy performance certificate (EPC) rating of C by 2028 and B by 2030. This impending deadline has highlighted the urgent need for capital investment in secondary and tertiary office stock to ensure marketability and tenantability. Alarmingly, only 8.3% of London offices are projected to meet the EPC B requirement by 2030, compelling existing owners to either invest in upgrades, secure financing for improvements, or divest at a potential loss.
Financial Decision-Making in the ESG Context
The emphasis on ESG is reshaping financial decision-making in real estate. Lenders are increasingly hesitant to finance assets lacking robust ESG credentials, while tenants are reluctant to occupy poorly performing buildings. To navigate these challenges, property owners often present improvement plans focused on energy efficiency. However, the social aspect of ESG is also gaining traction, particularly in the residential market, where there is a growing emphasis on placemaking—dedicating space for community benefit. This holistic approach to ESG is becoming a vital part of broader investment strategies.
Identifying ESG Risks
When it comes to ESG risks, clients predominantly focus on energy efficiency, but there is a growing awareness of governance issues as well. While mandatory climate-related disclosures are not yet universally required, many organizations are voluntarily adopting these practices to enhance transparency and accountability. Evelyn Partners assists clients in preparing and auditing climate-related disclosures, benchmarking their performance against industry peers. Even organizations that do not meet the criteria for mandatory reporting are keen to demonstrate their commitment to ESG, especially those with a strong public profile.
The Future of ESG in Real Estate
Looking ahead, Dunlop anticipates that the importance of ESG will continue to escalate. Mandatory reporting is still in its infancy, but legislative scrutiny is intensifying. As a result, there will likely be an increased demand for internal audits to assess risk management processes related to ESG. This will encompass monitoring environmental and governance risks, with a particular focus on combating greenwashing—a practice that remains prevalent in the industry.
Dunlop predicts that the thresholds for mandatory reporting will decrease as government objectives strengthen, compelling more organizations to comply with ESG standards. This evolution will necessitate a more rigorous approach to data collection and reporting.
The Role of Technology in ESG Data Collection
Fortunately, the landscape for gathering ESG-related data is improving, thanks to the emergence of various proptech solutions. These technologies are particularly focused on energy efficiency, enabling real estate owners to implement measures such as solar arrays and biomass plants to generate their own electricity. The availability of these tools is crucial as the legislative environment accelerates the pace of change in ESG requirements.
Conclusion
The integration of ESG considerations into real estate is no longer optional; it is a fundamental aspect of investment strategy and asset management. As stakeholders increasingly recognize the importance of strong ESG credentials, the industry must adapt to meet evolving standards and expectations. With the support of experts like Jason Dunlop and firms like Evelyn Partners, real estate organizations can navigate this complex landscape, ensuring they remain competitive and responsible stewards of their assets.
For more insights on the evolving ESG landscape in real estate, consider attending the upcoming UK ESG Real Estate Agenda event on October 3rd.
This article was produced in collaboration between Evelyn Partners and Studio B, Bisnow’s in-house content and design studio. For inquiries about how Studio B can assist your team, reach out to studio@bisnow.com.