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What is today's blog about?
In this week’s blog, we take a look at Environmental, Social and Governance (ESG) and how it is measured. ESG is becoming an important corporate and investment requirement, so all RICS APC and AssocRICS candidates need to be aware of it in relation to the Sustainability competency.
What is ESG?
In the RICS Guidance Note Sustainability and ESG in Commercial Property Valuation and Strategic Advice, ESG is defined as:
‘The criteria that together establish the framework for assessing the impact of the sustainability and ethical practices of a company on its financial performance and operations.
ESG comprises three pillars: environmental, social and governance, all of which collectively contribute to effective performance, with positive benefits for the wider markets, society and world as a whole.
Although ESG principally refers to companies and investors, ESG related factors are also used to describe the characteristics and, where relevant, operation of individual assets’.
Why is ESG a hot topic?
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.
Research by Fidelity showed that the application of ESG principles to specific assets within their portfolio during the Covid-19 pandemic performed 10% better.
What are the Principles for Responsible Investment?
The Principles for Responsible Investment were created to help implement ESG into investment decision making and reporting.
The six Principles are:
Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.
Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.
Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.
Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.
Principle 5: We will work together to enhance our effectiveness in implementing the Principles.
Principle 6: We will each report on our activities and progress towards implementing the Principles.
How is ESG measured?
There are a wide range of rating systems measuring the sustainability and ESG credentials of property:
Building Research Establishment Environmental Assessment Method (BREEAM)
B-Corp
C-pace in the USA
Dow Jones Sustainability Indices (DJSI)
Energy Conservation Building Code in India
EU Taxonomy
FTSE4Good
Global Real Estate Sustainability Benchmark (GRESB)
ISO 14001
Leadership in Energy and Environmental Design (LEED)
Minimum Energy Efficiency Standard (MEES)
MSCI ESG Rating
National Australian Built Environment Rating System (NABERS)
Standard and Poor Global – ESG Scores
Taskforce for Climate Related Financial Disclosures (TCFD)
UN Sustainable Development Goals
How is ESG reflected in property valuation?
The RICS Guidance Note aims to tackle the challenge of how ESG is reflected in valuations. This sits alongside the updated 2022 Red Book Global, which includes amendments relating to ESG and sustainability factors in valuation.
RICS states that, ‘while valuers should reflect markets, not lead them, they should be aware of sustainability features and the implications these could have on property values in the short, medium and longer term.’
This means that valuers need a strong working knowledge of ESG and sustainability and their impact on value. Examples of this include physical characteristics of buildings, policy, legislation, risk, obsolescence, capital expenditure on maintenance of the asset and market demand.
RICS further states that, ‘particular care should be taken when assessing or commenting on sustainability and ESG factors, as valuers may not have the specialist knowledge and experience required. In appropriate cases the valuer may recommend the making of further enquiries and/or the obtaining of further specialist or expert advice in respect of these matters.’
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Stay tuned for our next blog post to help build a better you.
N.b. Nothing in this article constitutes legal, professional or financial advice.