RICS Draft Guidance Note: Sustainability and ESG in commercial property valuation and strategic advice, 3rd edition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

4 Valuation instructions and terms of engagement

All valuation terms of engagement must be carried out in accordance with Red Book Global Standards VPS 1.

When agreeing instructions, valuers should ensure that the client is aware of sustainability and ESG issues relevant to the valuation purpose, basis and market, and their potential impact on value.

Valuers may also be asked to provide commentary and, in some cases, strategic advice beyond valuation reporting engagements in relation to, for example, proposals for sale or purchase, or for asset management. This strategic advice may go beyond the requirements of a valuation instructed on the basis of market value or investment value (worth).

Sustainability and ESG considerations may come into play for such strategic advice, in relation to trends in both occupier and investor markets. Instructions may also be sought around longer-term physical and environmental risks to the asset.

Strategic advice may include an opinion or judgement on the level of risk the value may be susceptible to under different market scenarios, with one of these areas of risk being the level of sustainability. In this context, a valuer may be instructed not only to assess the extent to which an asset currently meets sustainability criteria, but also hold an informed view on the likelihood of environmental and social factors impacting on values, either positively or negatively, over both the short and longer term. Commentary and strategic advice may take the form of scenario testing, sensitivity analysis or additional advice around valuation risks. Red Book Global Standards VPS 4 paragraph 2.5 recognises that:

'as markets continue to develop and advance, and as clients' needs continue to grow in terms of sophistication, additional demands are being placed on valuers to provide advice involving some element of prediction or forecast. Great care is needed to ensure that such advice is not misunderstood or misrepresented, and that any sensitivity analysis is carefully presented so as not to undermine the basis of value adopted.'

Valuers should be mindful of potential liability around forecasting and predicting values or market impacts. Valuers should also be mindful of advice that directly impacts investment decisions.

Where a valuer is providing strategic advice, Red Book Global Standards VPGA 8 states that:

'the valuer should consult with the client as to the use and applicability of sustainability and environmental social and governance (ESG) metrics and benchmarks that are applicable in each case.'

Valuers should clarify the nature of the strategic advice being given in the terms of engagement and, where appropriate, advise and educate the client as to appropriate sustainability and ESG considerations.

Valuers should be mindful of whether all or part of the commentary or strategic advice instruction is defined as a valuation, and whether it is an exception to Red Book Global Standards PS 1 section 5.

Whenever undertaking strategic advice beyond the valuation, the valuer should be certain that in addition to following relevant standards and having competence, they also have the appropriate resources to undertake the work on the agreed terms.