ESG and Commercial Property Valuation
- Aug 4
- 6 min read
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What is this blog about?
In this EG APC Series article, Jen Lemen BSc (Hons) FRICS discusses the new RICS guidance on environmental, social and governance (ESG) and sustainability in commercial property valuation. This is essential reading for RICS Registered Valuers and RICS APC and AssocRICS candidates undertaking (supervised) valuation work.
This has been issued in a Professional Standard (4thEdition) effective from 30 April 2026.
What is the aim of the Professional Standard?
The aim of the Professional Standard is to help valuers of commercial property to incorporate ESG and sustainability issues into their client advice. This moves the requirement from being a ‘nice to have’ to a mandatory requirement in all commercial property valuations.
Does the guidance apply globally?
The guidance is globally applicable, although it includes specific guidance for valuers in the UK, Europe and Australia.
What is ESG?
ESG is a natural progression from Corporate Social Responsibility (CSR) and reflects an increasing requirement from financial institutions and investors for ESG factors to be reflected in decision making and performance metrics.
It is also partly a response to COP 26 and the UK Government’s 2050 net zero carbon target, as well as helping to build resilient, future-proofed investments.
The Professional Standard includes two key definitions:
ESG (as per the IVS definition) –‘the criteria that together establish the framework for assessing the impact of the sustainability, ethical practices, financial performance and operations of a company, asset or liability. ESG comprises three pillars – environmental, social and governance – each of which may impact performance, the wider markets and society’.
Sustainability – ‘carrying out activities without depleting resources or having harmful impacts. It includes matters such as (but not restricted to) environment and climate change, health and wellbeing, and personal and collective responsibility that can or do impact valuation’.
ESG is defined as the assessment tool and framework for valuers, where sustainability is the goal or outcome.
How does the new guidance sit alongside the Red Book?
The Professional Standard sits alongside the RICS Valuation – Global Standards (Red Book, 2025). The Red Book provides procedural guidance and requirements for RICS Regulated Firms and Members (Registered Valuers, in particular). ESG is built into valuation guidance throughout the Red Book, including experience (PS 2), Terms of Engagement (VPS 1), inspection, investigations and recording (VPS 4), reporting (VPS 6) and valuation specifics (VPGA 8).
IVS, which underlines the Red Book, requires that ‘the impact of significant ESG factors should be considered in determining the value of an … asset … ESG factors and the ESG regulatory environment should be considered in valuations to the extent that they are measurable and would be considered reasonable by the valuer applying professional judgement’.
The key challenge relating to ESG and valuation is the balance of current Market Value and future risk. The valuer needs to be aware of significant (i.e., have a material impact and be actively priced by the market) ESG factors and be able to comment on their relationship with the market evidence and impact on the market they are valuing within.
How do I apply professional scepticism to ESG and valuation?
This requires an appreciation of and application of professional scepticism to:
How ESG factors affect the willing buyer and seller within a transaction, under the definition of Market Value. This is different to the impact on a specific buyer or seller (i.e., Investment Value). Examples could be where sustainability features, e.g., high efficiency HVAC, are priced into a higher rent or low vacancy rate assumption. Green lease clauses could also impact upon pricing in the open market.
How ESG factors affected the price or rent agreed in any comparable evidence, e.g., any certifications or refurbishment cost planning (e.g., the cost of compliance with the Minimum Energy Efficiency Standards, or MEES). Where costs are factored into a valuation, they should be provided by qualified individuals, such as a Chartered Quantity Surveyor. If an index or software is used instead, then the limitations of this should be explicitly stated.
How any physical (e.g., flooding) or transition risks (e.g., move towards a low carbon economy) impact upon value. Risks of this nature, known as resilience, could be commented on through the use of Government or official maps and specialist reports.
These risks could be analysed using a RAG (red, amber, green) rating system or a SWOT analysis to highlight key ESG risks and rewards in the valuation process.
How can I incorporate ESG into my valuation work?
Valuers can incorporate the impact of ESG into their valuations in a variety of different ways. This could be adjustment of the comparable evidence (rents and yields) to account for ESG benefits, rental growth assumptions or ‘brown discounts’ (for properties that are non-compliant or have poor ESG credentials). Valuers should also comment on KPIs for environment (water usage and biodiversity net gain, for example), social (indoor air quality and community impact, for example) and governance (green lease clauses, for example) in valuations. A full list is provided within the RICS guidance.
A starting point...
We have made observations below on how a valuer could start to comply with the new Professional Standard within a valuation report. This is a basic starting point - what else would you include or how could you adapt this to a specific property you have been involved with valuing?
SPIRE TOWERS, LONDON
1. Environmental Factors & Climate Risk
Energy Performance & Carbon Intensity: The subject property currently holds an EPC Rating of B, with an expiry date of 21 December 2031. This is compliant with the Minimum Energy Efficiency Standard (MEES).
Physical Risk: According to the Environment Agency flood risk map, the asset is located in a Flood Zone 2. We have identified local mitigation measures, including raised thresholds, which we consider sufficient to maintain current marketability.
2. Social & Occupier Factors
Tenant Alignment & Wellbeing: The property features WELL Gold certification and high-quality facilities, which are demanded by tenants in this market.
Amenity & Demand: There is evidence in the local market that occupiers are prioritising assets with superior indoor air quality and natural light. We have reflected this through our analysis of the comparable evidence, which confirms that these features have a material impact on value.
Social Value: The asset provides public realm integration and community space, which enhances the long-term placemaking appeal and supports tenant retention.
3. Governance & Lease Terms
Green Lease Analysis: We have reviewed the occupational leases and note that 95% of the floor space is subject to green lease clauses.
Data Sharing: These clauses mandate the sharing of energy and water consumption data.
Valuation Impact: This transparency reduces the risk of unforeseen operational costs and aligns with the requirements of institutional investors, thereby supporting the exit yield applied.
Valuer’s Note on Information Reliance: In preparing this commentary, the valuer has relied upon information provided by the client. Where cost estimates for retrofitting Suite 3 have been used, these are considered reasonable and proportionate based on current market benchmarks, but are subject to the limitations set out in the Terms of Engagement.
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N.b. Nothing in this article constitutes legal, professional or financial advice.