ECB: Lenders Struggle with ESG Risks

Lenders in the commercial real estate sector continue to struggle with the increasing environmental risks that impact the value and viability of properties. As investors and tenants increasingly seek energy-efficient buildings, the value of less sustainable properties is at risk of declining.

This is due to the growing preference for buildings with high energy performance and low carbon emissions, making properties that do not meet these criteria less attractive.

This is stated by the European Central Bank (ECB) in its latest Supervision Newsletter. The newsletter discusses the ECB's findings following inspections of commercial real estate at banks, highlighting the challenges in property valuations and the impact of environmental risks. It emphasizes that banks are struggling to collect ESG data, which is essential for accurate valuations and risk management. The importance of up-to-date valuations to effectively manage risks is also underscored.

In addition to the pressure on energy efficiency, physical risks such as floods, wildfires, and land subsidence are increasingly playing a role in property valuations. These risks not only raise development and insurance costs but also shift demand towards safer locations.

In some regions, there is growing concern about the availability of sufficient freshwater resources, further pressuring property valuations. The risks associated with climate change not only affect the direct value of real estate but also threaten the cash flows of commercial properties, which in turn impacts rental and capital values.

Despite these factors already noticeably influencing property prices, inspections reveal that many lenders struggle to gather essential information on environmental, social, and governance (ESG) factors. Basic data, such as energy performance, is often incomplete or entirely absent in assessments. Only a few banks consider the necessary investments to bring energy performance up to an acceptable level when granting loans.

However, Dutch major banks ABN Amro, ING, and Rabobank are leading the way in Europe with the introduction of the so-called Sustainability Paragraph (DuPA) in identifying ESG risks.

Experts emphasize that lenders should instruct their appraisers to collect data on crucial environmental factors wherever possible. This includes analyzing energy performance certificates, energy consumption, and mapping risks such as air and water pollution, climate change, and resource scarcity. Only by taking these factors into account can the sector better prepare itself for the growing challenges of climate change.

Read more on the ECB website.