Market is now driving progress on ESG

Non-financial metrics are playing a bigger role, but the question of who is going to fund the technology needed to decarbonise remains, reports Nicol Dynes.

Regulations have forced compliance with ESG rules, but companies are now taking over in driving sustainability forward, Andy Hay, managing director of EMEA property management and ESG at Colliers, told Real Asset Impact.

“The regulatory framework set the context and got things moving, but now it’s the market driving progress,” he said. “We’re seeing this already and we will see a lot more of that in the future.”

Hay added that non-financial metrics were playing a bigger role and companies had a carbon budget alongside a financial one, and even though they were not on a par yet, the direction of travel was clear. There were instances of bonuses not being paid if ESG targets had not been met, and banks were putting non-financial metrics in their covenants for loan agreements.

“We are seeing a definite change in mindset, finally,” said Christiane Conrads, global real estate ESG leader at PwC. “Alongside regulation, risk assessment as well as stakeholder demand have become big drivers, as more international corporations and tenants develop their own ESG strategies.”

‘The regulatory framework set the context and got things moving, but now it’s the market driving progress. We’re seeing this already and we will see a lot more of that in the future.’

Andy Hay, Colliers

European companies could consider the example of Singapore, which has become a global sustainable ESG hub with a strong focus on biodiversity. “Regulation, both horizontal and top-down, has been driving change in Singapore, but with a good overview of all the different parts,” she said.

The market will experience big changes as companies adapt to the new requirements. Colliers’ recent Global Investor Outlook survey found that 45% of investors are planning to dispose of up to 20% of their assets over the next five years as they shift to higher-quality assets.

“There’s clearly an upside to making buildings energy efficient, but there’s also a huge amount of uncertainty at the moment,” said Damian Harrington, a director and head of EMEA research at Colliers.

“There’s uncertainty over valuations, over the cost of making buildings ESG compliant and over financing, so investors are almost shooting blind and have to take a bit of a punt, not knowing what their returns will be.”

The cost of ‘decarb refurbs’

A green premium is guaranteed, as very few buildings are fully ESG compliant, but it is difficult to quantify.

A brown discount on older assets is equally certain, but again difficult to quantify in a market in transition. 

“There’s been a shift in value-add assets this year. The discounts are bigger and buyers want super-low prices,” said Harrington. “More and more funds are specialising in taking these assets on and refurbishing them, but there’s a real difficulty now in pricing buildings that are being disposed of, because of all the uncertainty over interest rates, yields and everything else.”

Europe is in a transition phase to green buildings being the norm, but there’s a long way to go: only 0.24% of buildings in EU countries have been retrofitted. The technology is there and is constantly improving, but costs are a big obstacle.

“There are great aspirations at corporate level, but the difficulty is translating them into practical, cost-effective action,” said Hay.

‘There are very few examples of a carb-free refurb. It’s an expensive, time-consuming strategy, but it is a must.’

Peter Stocks, Cundall

He pointed out that ambitions often bump up against the reality of expensive decisions, but progress can start with small changes, such as installing meters and using communal rooms for out-of-hours working so that the heating or air-conditioning can be switched off everywhere else. Some companies are choosing to close their offices on a Friday.

But there’s still a question mark over the process of getting tenants to work in partnership. Sometimes it works smoothly and everyone is on board; other times it can be a protracted and tricky negotiation.

Data-sharing, or rather the lack of it, is a case in point. “Data is a challenge, as collaboration is improving, but varies enormously,” said Conrads. “Yet it is crucially important for the industry to work together.”

Hay agreed that “we’re still a million miles away from sharing data”, which is a the first step to developing an effective decarbonisation strategy.

Finding cost-effective changes

There is also the question of who is going to fund the technology needed to decarbonise. “Many companies have net-zero carbon by 2030 goals, but are working out the costs,” said Peter Stocks, a partner and head of building services at Cundall. “They are dipping their toe in the water and trying to make cost-effective changes and find the right balance.”

The best strategy is not stripping back everything to a shell and then putting everything back where it was, according to Stocks, but to keep the main pipes and ducts, clean them and pressure test them to save cost and carbon.

“There are very few examples of a carb-free refurb,” said Stocks. “It’s an expensive, time-consuming strategy, but it is a must, or they won’t be able to let the building.”

At some stage, ESG compliance will become standard, at least for the prime rental market, and non-compliance will be penalised.

“It’s early days, but, in future, buildings will be graded according to sustainability, just like hotels,” said Stocks. And most people prefer five-star hotels.

Alongside regulatory pressure and ethical motivations, there are now strong commercial reasons for being ESG-compliant.

“Companies may occupy less real estate [in the end], but make sure it’s sustainable,” Conrads concluded.