Real estate lenders seek a clearer path to effective ESG

Panellists at CREFC Europe’s Autumn Conference said many lenders are struggling to quantify ESG incentives, despite an uptick in green mortgage issuance.

The $260 trillion real estate industry accounts for almost 40 percent of global greenhouse gas emissions, with research from the World Building Council showing only 1 percent of buildings globally are aligned to net zero. These stark findings were highlighted by Julie Townsend, executive director and head of environmental consultancy at CBRE, during a panel discussion with sustainability experts at last week’s Commercial Real Estate Finance Council Europe Autumn Conference, held in London.

Townsend, moderator for the discussion, added that establishing a clearer understanding around “what good looks like” when it comes to environmental, social and governance matters is crucially important right now, and that ESG-resilient businesses will stand a better chance of attracting capital.

Panellists discussed the practical considerations of embedding ESG into lending strategies, and the challenges faced by lenders and borrowers across real estate markets in how to quantify sustainability.

“We’re something like 20 years into the discussion on sustainability, [but only for the last] four or five years companies have sought to report on sustainability consistently,” said Alana McPhee, from the Sustainable Product Group at UK bank Barclays, explaining that sustainability reporting standards remain in their infancy.

But she argued sustainability reporting is a game changer for investment decision making, and is headed in the right direction.

“[It has helped] growth in the investment community as a result of having audited numbers that you can rely on and are comparable,” said McPhee. “Over the next few years, it’s going to be very exciting in terms of how we start to think in the finance industry and what conversations we have in terms of evaluating investments, and what actually is the criteria for ESG as we move forward.”

There is a lack of data in areas including embodied carbon, added Townsend. But she argued sustainability now has a huge impact on capital values. “The institutions are setting the requirements around what they buy, with carbon being very much an investment committee requirement, so if they’re evaluating criteria at the point of purchase and it doesn’t meet criteria, they price adjust, which impacts value.”

A key challenge is the lack of transparency tools to measure assets’ sustainability performance, she added. “There is now a requirement to understand carbon risk and net zero but BREEAM Excellent and a good EPC doesn’t necessarily translate, so we need new tools to push forward and recognise this knock-on effect on value.”

Anna Devlet, head of social sustainability at real estate investment trust British Land, argued ESG is a broad term with many components, making measurability difficult.

“We struggle being termed under the sort of umbrella term of sustainability,” Devlet said. “There are different discussions over how to measure it, but it’s an outcome driven metric, so that people can understand it and they can get behind it.”

Panellists agreed the issuance of green mortgages has boomed in Europe.

Real estate investor and developer Argent is participating in this trend, according to its head of sustainability and digital strategy, Claudine Blamey, who said it has related products in the pipeline.

“There are a lot of green financing and green mortgage products now. We build our buildings to be as sustainable as possible and in turn this means our occupiers and customers who want to purchase them can access green finance products.”

Focus on the ‘S’

The ‘S’ – social – component of ESG is climbing the agenda of many lenders and is becoming more intertwined with how lenders are starting to look at buildings and developments.

“When you’re developing something, we have to remember that this is something for people to use, and that should be the first thought, but people sometimes forget that,” said Barclay’s McPhee.

While the ‘E’ part of ESG is outcome-driven, the social side requires more approach-driven metrics, added Devlet. “This part is harder for a lot of people to understand, which is a challenge, and it’s something that is a bit behind [considering] externally what has evolved in terms of regulation.

“The direction of travel, is that businesses have to contribute towards society, towards social creating social values and I think we’re going to see a lot more change coming forward quite rapidly.”

Devlet argued there are business drivers to being socially conscious, including convincing local authorities of the social value of proposed schemes. “We want to ensure that we can continue to get planning consents, so we need to have a very strong education [incentive] offering evidencing what our social value is.”

Socially conscious businesses can differentiate themselves in an increasingly competitive market, she added: “How can you add brand awareness? What makes people more attracted to your space over other spaces? Successful businesses in the future will be the ones that really have integrated social purpose into their business models.”

Leaders and followers

According to Helen Drury, sustainability lead at logistics owner Tritax Management, when it comes to sustainability, there are leaders in the real estate market, and then there is a long tail of followers. But most are fast learners when it comes to ESG, she said.

“This is where regulation can come in, to incentivise those at the leading end of the market, as they’re getting the competitive advantage, and set a minimum standard, [which] means the market reacts to that,” she said.

Drury added that not all businesses have the skills to meet the challenge. “They’re not acting because they don’t have that in-house sustainability knowledge or understanding. So, having more of those incentives, opportunities and raising that awareness is really important.”