Valuation transforms: Focus on ESG

The valuation of real estate is undergoing a revolutionary change, driven by a global shift towards responsible and sustainable business. ESG factors (Environmental, Social, and Governance) have moved from being peripheral to central, influenced by global agreements such as the Paris Agreement and pressure from financial regulators.

ESG factors are playing an increasingly significant role in how real estate is valued. Thanks to frameworks like the TCFD (Task Force on Climate-related Financial Disclosures), sustainability is not only focused on the environment but also on economic and social aspects.

ESG factors have come into the spotlight due to new regulations, expectations of those involved in real estate, and the need to manage risks properly. Properties that are strongly focused on ESG are now seen in many markets as smarter choices. They are likely better able to retain their value, attract investors, and obtain favorable financing terms.

Pressure from the Banks

Under pressure from regulators, banks have increasingly demanded ESG information (Environmental, Social, and Governance) from real estate investors to whom they have lent. In the Netherlands, major banks such as ABN Amro, ING, and Rabobank are leading this development. They introduced a so-called 'sustainability paragraph' a few years ago, and a new version is being prepared, known as Real Estate Taxonomy 17. It must be implemented later this year.

What this means is that the bank increasingly expects the appraiser to provide comprehensive ESG information. Real Estate Taxonomy 17 is an important tool, as it offers a comprehensive method for evaluating commercial real estate. It focuses not only on sustainability, energy efficiency, and ecological responsibility but also looks at the future-proofing and flexibility of buildings, as well as the administrative aspects of green leasing. It's a comprehensive and thoughtful approach that fits the growing focus on responsible business in the real estate sector.

The taxonomy is divided into various parts, such as:

• Location Features: Here we look at the neighborhood. What is the urbanization like, how easy is it to get there, and are there highways or public transport nearby?
• Energy Transition and Risks: This covers the environment and climate. Think about charging points for your electric car, climate risks, water stress, and even earthquake risks.
• Object Features: This part concerns the building itself, such as when it was built, what kind of construction it has, and whether it has sustainability certificates like LEED and BREEAM.
• Energy: Here we talk about things like solar energy, renewable resources, insulation, lighting, and how much energy the building consumes.
• Water Use: This covers water conservation and how water is managed, such as by reusing rainwater.
• Ecology: This part concerns green features in and around the building, such as green roofs and walls.
• Future-Proofing and Flexibility: Here we look at the future, such as planning, changing functions, how spaces are arranged, and whether materials can be reused.
• Material Use: This is all about the use of sustainable and reusable materials.
• Building Passport and Green Lease: This part deals with the administrative side of the building and how it is sustainably leased.
• Consumption and Sustainability Measures: Finally, this part looks at energy consumption and greenhouse gas emissions, and what is done to make the building more energy-efficient.

RICS Takes Initiative

The initiatives in the Netherlands are part of a global development - we see that RICS, a major global organization of real estate professionals, is taking the ESG themes (Environmental, Social, and Governance) seriously. RICS appraisers must adhere to specific rules and pay extra attention to matters such as sustainability and ESG when assessing a property. This means that they must follow the so-called RICS Red Book, which contains various rules and standards.

What does this mean in practice? Customers must be well informed about significant issues around sustainability and ESG. Appraisers must also know what is happening in the market and what specific risks exist in different areas. They may or must use data from various sources to assess how sustainable a building is. The purpose and basis of the valuation must be properly aligned.

It becomes even more complicated, as appraisers must also consider things like taxes, laws, and various systems such as LEED, BREEAM, and WELL. They must also take into account planning, zoning, and even ESG factors in financing and leasing the property. And as if that were not enough, business and regulatory requirements also play an important role.

In short, the ESG framework is becoming increasingly important. Appraisers have been given a broader role and must consider various different factors to determine a property's value as accurately as possible. This can affect market value, risk profile, and even the property's cash flow. The ultimate goal? Achieve a more accurate and comprehensive valuation.

This new approach is not without challenges. Many different factors can influence the price and market value of commercial real estate, such as energy efficiency, location, and even the intentions of the owner or investor. Appraisers and investors must, therefore, work closely together and take a broad perspective. One of the big questions here is whether pursuing ESG goals actually leads to a different price or even a new market value. It's a fascinating but complex new world in real estate valuation.

Blue Module has created the ESG BasicScan, an advanced tool that quickly provides insight into the ESG impact of real estate portfolios. By using the most recent regulations (such as DUPA 2.0), this tool enables appraisers to quickly and efficiently collect the required ESG information. This also includes exclusive information about the energy performance of the building. But we go beyond that. Our approach makes it possible to collect even more unique ESG data, such as energy data from smart meters, air quality information, and feedback from tenants. This provides deeper insight and aids in making better decisions.