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Climate change: investors are incorporating climate risks into property values, says AEW

In its May monthly European research update on the future of real estate, AEW wrote that evidence is growing that investors are shifting from awareness to pro-active impact investing which has already fuelled strong growth in sustainable investment products – such as green bonds and unlisted green funds.

Climate change risks have increased as demonstrated by growing insured catastrophe losses over the past 15 years, says AEW. Asset manager awareness is growing as exemplified by the investor group Climate Action 100+ to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change. 342 investors with more than USD $33 trillion in assets under management have signed up to the initiative.

Government regulation increasingly requires investors to report on how they mitigate – and adapt to – climate change risks. In real estate, the negative impact of climate risks on property values is increasingly taken into account.

Hans Vrensen, head of research and strategy at AEW, explains:

“So far real estate constitutes a relatively small fraction of ESG investment products, which are dominated by bonds, equities and infrastructure. Investors lack clarity on definitions and metrics regarding sustainable investing across all asset types, despite initiatives such as the Impact Management Project. Developing a classification system (‘sustainable finance taxonomy’) and an EU label for green financial products are among the objectives of the recently created EU’s Technical Expert Group on Sustainable Finance. This will reduce concerns about greenwashing and therefore allow sustainable finance to scale up and not remain a niche product.

“In real estate, we have seen the global GRESB fund-benchmarking reach over €1 trillion in European AUM. But, at the same time, a large number of building-specific certifications globally has also created confusion among both investors and occupiers as certifications are not based on consistent methodologies. The real estate investment management industry will, therefore, have to embrace more detailed and consistent reporting and further innovation to meet investors’ increasingly pro-active ESG requirements.”

Investments in unlisted green funds has also been growing, with total invested volume increasing from €3 billion in 2008 to €57.6 billion in 2018 in Europe, according to AEW. Nevertheless, green funds represent less than 10% of the unlisted European fund universe.

Real estate represents just 4% of the European unlisted green funds. This leaves plenty of room for green real estate funds to grow. As investors need more clarity around what constitutes a green real estate fund, a label for real estate – relying on ESG indicators and published by the French Ministry of Finance – will soon be launched in France.

james.wallacr@realassetmedia.com