Close consultation: RICS Draft Guidance Note: Sustainability and ESG in commercial property valuation and strategic advice, 3rd edition

Sustainability and ESG in commercial property valuation and strategic advice 3rd ed


Basis of value

'A statement of the fundamental measurement assumptions of a valuation.' (Source: RICS Valuation - Global Standards Glossary).

Capital expenditure

Money spent by a business or other body on tangible items to develop, maintain or improve an asset. In a real estate context this might typically be maintenance and improvement of services, fitting out and alterations. It may be done to meet regulatory or statutory requirements, occupier or investor expectations or to improve the lifecycle of the property.

Capitalisation (income)

A valuation model that applies a yield derived from transactional and other evidence to an income stream, usually a rent. The technique is referred to as 'implicit' as all of the assumptions around e.g. risk and growth are built into the capitalisation rate (yield) used. In some cases, a current and reversionary income are capitalised.

Discounted cash flow (DCF)

A valuation model where the forecasted cash flow is discounted back to the valuation date, resulting in a present value of the asset. The discount rate in a discounted cash flow model will be based on the time cost of money and the risks and rewards of the income stream in question.

Environmental, social and governance (ESG)

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.

Fair value

"'The price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date." (This definition derives from International Financial Reporting Standards IFRS 13).' (Source: RICS Valuation - Global Standards Glossary).

Generally Accepted Accounting Principles (GAAP)

These may have regional variations and standards such as US GAAP and UK GAAP.

International Financial Reporting Standards (IFRS)

A set of common rules for financial reporting defined by the International Accounting Standards Board (IASB).

Income approach

'[A valuation] approach that provides an indication of value by converting future cash flows to a single current capital value.' (Source: RICS Valuation - Global Standards Glossary).


A balance between the carbon and other greenhouse gas emissions produced and the impact of measures to remove emissions. It can be referred to with different degrees of scope, for example at a global level, company or portfolio level or in respect of an individual asset.


The decline of an asset over time. It may take a variety of forms such as the physical condition, the remaining economic life, the comparative running costs and the comparative efficiency and functionality. The impact on value might not be linear and is subject to market factors and the nature of the asset. In sustainability and ESG terms it can mean failure to meet market, investor and regulatory requirements.

Paris Agreement

'The Paris Agreement is a legally binding international treaty on climate change. It was adopted by 196 Parties at COP 21 in Paris, on 12 December 2015 and entered into force on 4 November 2016.

Its goal is to limit global warming to well below 2, preferably to 1.5 degrees Celsius, compared to pre-industrial levels.

To achieve this long-term temperature goal, countries aim to reach global peaking of greenhouse gas emissions as soon as possible to achieve a climate neutral world by mid-century. (Source: UNFCCC secretariat (UN Climate Change)).

Plant and equipment

Tangible assets that fall under three broad categories defined in RICS Valuation - Global Standards, VPGA 5:

  • Plant: Assets that are combined with others and that may include items that form part of industrial infrastructure, utilities, building services installations, specialised buildings, and machinery and equipment forming a dedicated assemblage.
  • Machinery: Individual, or a collection or a fleet or system of, configured machines/technology (including mobile assets such as vehicles, rail, shipping and aircraft) that may be employed, installed or remotely operated in connection with a user's industrial or commercial processes, trade or business sector (a machine is an apparatus used for a specific process).
  • Equipment: An all-encompassing term for other assets such as sundry machinery, tooling, fixtures, furniture and furnishings, trade fixtures and fittings, sundry equipment and technology and loose tools that are used to assist the operation of the enterprise or entity.

Rent-free period

An incentive commonly granted by a landlord to a tenant often at the start of a lease - where no payment is required. They vary in duration dependent on the market, some for a few months, others can last years. They generally reflect one or more of the following factors: the time required to fit out the property to suit the tenant's needs, overheads associated with the time required to reinstate the former premises, agreement by the tenant to carry out repairs or improve the property, which may benefit the landlord, commitment from the tenant to pay a higher rent over the term, benefiting the landlord in the long run, acceptance of specific liabilities or restrictions under the lease.

Scenario testing

A process of modelling and evaluating events or scenarios that could take place in the future and predicting the various feasible results or outcomes on value, commonly measured in terms of impact on cash flow (including rent), net present value and relevant investment performance indicators. IVS 105 recognises that valuers may apply multiple scenarios of, for example, possible future cash flows.

Scope 1, 2, 3 - carbon emissions

  • Scope 1: direct emissions from owned or controlled sources
  • Scope 2: indirect emissions from the generation of purchased energy
  • Scope 3: all indirect emissions (not included in scope 2) that occur in the value chain of the reporting company.

(Source: Greenhouse Gas Protocol)

Sensitivity analysis

An investigation of the degree to which valuation or modelling outcomes vary with a change in one of the assumptions or inputs. This helps demonstrate the importance of an individual assumption or input to the calculation as a whole.

Social value

'The social benefits that flow to asset users (social investment) and the wider financial and non-financial impacts including the wellbeing of individuals and communities, social capital and the environment, that flow to non-asset users.' IVSC Defining and Estimating 'Social Value'

Strategic advice

Engagement or consultancy beyond the scope of a typical valuation instruction that provides additional information to the client. The information does not have to form a single conclusion and may instead model a number of scenarios and involve sensitivity analysis. Strategic advice can include qualitative and quantitative information that describes property risk. The nature of strategic advice means it is typically tailored to suit the particular investment and operational requirements of a specific client and is therefore more akin to valuation on the basis of investment value or worth (as opposed to market value).


'The consideration of matters such as (but not restricted to) environment and climate change, health and well-being, and personal and corporate responsibility that can or do impact on the valuation of an asset. In broad terms, it is a desire to carry out activities without depleting resources or having harmful impacts.

There is as yet no universally recognised and globally adopted definition of 'sustainability'. Therefore, members should exercise caution over the use of the term without additional appropriate explanation. In some jurisdictions, the term 'resilience' is being adopted to replace the term 'sustainability' when related to property assets.

Sustainability may also be a factor in environmental, social and governance (ESG) considerations.' (Source: RICS Valuation - Global Standards Glossary).

UN Sustainable Development Goals

A series of 17 targets developed by the UN in 2015 for their 'Agenda 2030' that address what they consider to be the most important economic, social, environmental and governance challenges of our time. They include: no poverty, zero hunger, good health and well-being, quality education, gender equality, clean water and sanitation, affordable and clean energy, decent work and economic growth, industry -innovation and infrastructure, reduced inequalities, sustainable cities and communities, responsible consumption and production, climate action, life below water, life on land, peace and justice - strong institutions, partnerships and goals.