RICS Draft Guidance Note: Sustainability and ESG in commercial property valuation and strategic advice, 3rd edition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

1 Introduction

1.1 Scope

Corporate and investment requirements relating to sustainability; resilience; and environmental, social and governance (ESG) are some of the most important issues facing world financial markets. In a real estate context, these requirements influence investment approaches as they may affect prospects for rental and capital growth, and susceptibility to obsolescence.

This guidance note is principally intended for valuing commercial property: non-domestic real estate that fulfils an operational or occupational purpose for business and is commonly sold or let in the market. It may also be referred to as 'investment property'. Other asset classes such as rural, residential, public sector and infrastructure fall outside the remit of this guidance note. Valuation is a component of a wider construction and management cycle, but this guidance note does not cover life cycle considerations or circular economy principles in detail.

Many commercial properties contain plant and equipment, which can be relevant to sustainability and ESG considerations. This guidance note does not cover plant and equipment assets in detail, though valuers should be acquainted with the wider principles where they impact the asset to be valued (see RICS Valuation - Global Standards VPGA 5.3). Markets in different jurisdictions reflect sustainability and ESG considerations in varying ways and to different degrees. The degree and pace at which aspects of sustainability may feed into value can vary depending on the property type and the geographic market in which the asset is situated. For example, flooding or severe storms may be a particular risk in some locations, and the degree to which resilience to these events affects value may require an accentuated level of coverage. Further specific detail covering environmental risks can be found in the current edition of Environmental risks and global real estate, RICS guidance note.

1.2 Key sustainability initiatives

Sustainability covers a broad range of environmental, economic and social factors defined as the 'three dimensions' in the global UN Sustainable Development Goals. This range of factors is sometimes referred to in a corporate or investment context as environmental, social and governance (ESG).

There are political initiatives that support the consideration of sustainability and ESG at a global level. The Paris Agreement is a legally binding international treaty on climate change, signed by 196 parties, which came into effect in 2016. The countries party to this agreement will have to implement legislative changes in their national economies to stay in line with these legally binding targets, meaning that compliance will be increasingly important at an asset level.

In addition to the UN Sustainable Development Goals, there are other popular reference points for better understanding sustainability, some of which are particularly relevant or suited to real estate, finance and valuation. For example, the Task Force on Climate-related Financial Disclosures (TCFD) is supported by major financial and real estate stakeholders globally.

A list of international sustainability and ESG rating and benchmarking schemes is included in Appendix A. Some of these schemes were designed for accountancy and asset management purposes, and valuers should be conscious of their relevance and weight in evidence. See Comparable evidence in real estate valuation, RICS guidance note, 1st edition, sections 4.5.2 and 4.5.3.