Regulation and clients drive demand for sustainable buildings – IIGCC research

EU and member state regulation governing the real estate market and demand for sustainable buildings is changing market conditions and investor behaviour, according to a new paper published by the Institutional Investors Group on Climate Change (IIGCC) which represents investors and asset managers worth €7.5trn.

Market participants believe these changes have the potential to impact investment risk and the financial performance of real estate assets.
The paper – “Protecting value in real estate: Managing investment risks from climate change” – details examples of changes in market behaviour investors have recently seen that impact financial performance.

This includes low energy certificate ratings being used to reduce acquisition prices as part of the overall transaction negotiations in France, UK and Germany; requests for energy performance certificates early in the transaction process as part of their standard due diligence processes; setting minimum sustainability standards; introduction of formal ‘green’ clauses in standard tenant leases and sustainability risk assessments prior to acquisition.

In response, leading market participants are no longer awaiting empirical evidence demonstrating the impact to financial performance from valuation analysis. Rather they have already started to embed green building programmes in their real estate investment and asset management practices, and developed sector initiatives and tools to mitigate these risks.

The paper, which comes after the introduction of the Energy Efficiency Directive and the recent European Parliament vote for an 80% cut in energy used by buildings relative to 2010 levels by 2050, also outlines the legislation many member states have in place which is driving changes in the real estate market. These actions signal the ambition of European policymakers to introduce strong energy efficiency targets for the real estate sector.

The paper gives guidance on how to ensure real estate portfolios are managed in a way that addresses investment risks and opportunities arising from climate change and sustainability.

Stephanie Pfeifer, executive director of the Institutional Investors Group on Climate Change, said real estate investors are making progress incorporating sustainability concerns into decision-making.

“However regulatory pressures on the sector will only grow, increasing the impacts on property values. It is critical that investors understand and manage the implications of these changes. In a sector which accounts for 40% of final energy use and 35% of carbon emissions in the EU, supportive policies which reduce energy use in buildings will be crucial to slowing dangerous climate change.”

Tatiana Bosteels, head of Responsible Property Investment at Hermes Real Estate Investment Management Limited (HREIML), and chair of IIGCC Property Programme, said: “In order to protect the long-term value of their real estate investments, it is property investors’ fiduciary duty to understand today the changes and new risks brought by climate change and resource efficiency concerns in order to mitigate them ahead of time and to take advantage of new market opportunities.”

“There are many tools and initiatives out there to help the sector adapt. There is also a historical opportunity to add value to real estate investments while scaling up the sustainable buildings and energy efficiency sector to a size aligned with the needs of society today.”

The IIGCC is a forum for collaboration on climate change for European investors. With more than 80 members, it provides investors with a platform to encourage public policies, investment practices, and corporate behaviour that address long-term risks and opportunities associated with climate change.

 

IIGCC Membership (March 2013) 
AmundiHSBC Investments
AP1 (First Swedish National Pension Fund)Hudson Clean Energy Partners
AP2 (Second Swedish National Pension Fund)Impax Asset Management
AP3 (Third Swedish National Pension Fund)Insight Investment
AP4 (Fourth Swedish National Pension Fund)Joseph Rowntree Charitable Trust
APG Asset ManagementKent County Council Pension Fund
ATPKleinwort Benson Investors
Aviva InvestorsLegal & General Investment Management
AXA Real EstateLondon Borough of Hounslow Pension Fund
Baptist Union of Great BritainLondon Borough of Islington Pension Fund
BBC Pension TrustLondon Borough of Newham Pension Fund
Bedfordshire Pension FundLondon Pensions Fund Authority
BlackRockMayfair Capital Investment Management
BMS World MissionMerseyside Pension Fund
BNP Paribas Investment PartnersMercer Global Investments Europe Limited
BT Pension SchemeMn Services
CB Richard EllisNordea Investment Funds
CCLA Investment ManagementOsmosis Investment Management
Central Finance Board of the Methodist ChurchPensionDanmark
CF Partners (UK) LLPPGGM Investments
Church Commissioners for EnglandPKA
Church of SwedenPlatina Partners
Climate Change CapitalPRUPIM
Co-operative Asset ManagementRailpen Investments
Corporation of London Pension FundRobeco
Dragon Capital Group Ltd.Sampension
Earth Capital PartnersSarasin & Partners LLP
Environment Agency Pension FundScottish Widows Investment Partnership
Environmental Technologies FundSouth Yorkshire Pensions Authority
ERAFPTemporis Capital
Ethos FoundationThe Church of England Pensions Board
F&C Management LtdThe Church in Wales
First State InvestmentsThe Roman Catholic Diocese of Plymouth
Five Oceans Asset ManagementThe Roman Catholic Diocese of Portsmouth
Generation Investment Management LLPThe Roman Catholic Diocese of Salford
Greater Manchester Pension FundUnited Reformed Church
Grosvenor Fund ManagementUniversities Superannuation Scheme
Henderson Global InvestorsWest Midlands Metropolitan Authorities Pension Fund
HermesWest Yorkshire Pension Fund
Hermes GPE LLPWilliam Leech Charitable Trust
HgCapital 
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