According to Urban Land Institute (ULI) experts, who are considered specialists in the field of trends prevailing in the real estate market (this time they supported their expertise with analyses by Ferguson Partners), it will be more difficult for investors, and above all developers, to obtain funds for their operations. More difficult if they do not include environmental, social and corporate governance principles (ESG) in their business.
The bank won’t grant you a loan?
It’s quite shocking, but we read correctly: according to ULI, lenders’ attitudes are changing, especially in Europe. This is supposed to encourage real estate companies to focus on… decarbonization.
– Despite the difficult interest rate environment, banks and other lenders are increasing their attention to proper reporting of ESG aspects – says Bożena Jankowska, who was one of the experts cooperating with ULI during the work on the report and holds the position of managing director and global head of the ESG department at Slate Asset Management.
– Lenders are asking for information on net zero emissions targets and the transformation path they are taking. This is part of putting more pressure on climate risk and will influence a change in direction – says Bożena Jankowska.
In her opinion, banks used to ask only a few questions about ESG before granting a loan. Now they are more demanding and expect more and more information from entrepreneurs in this area.
New standards are coming
It is believed that changes to the International Financial Reporting Standards (IFRS 1 and IFRS 2), which constitute the global reporting framework and are intended to ensure consistency in reporting, require companies to report on sustainability risks. This could include information on energy consumption during the implementation of investments, or at least the inclusion of issues related to energy intensity in business plans. In theory, IFRS 1 and IFRS 2 are voluntary. However, as we read in the ULI report, it is “expected” that they will soon become mandatory. The taxonomy adopted in the European Union also specifies six environmental objectives that real estate companies must meet to be considered “sustainable”.
A few words on the subject, what is the original source of the described new standards, which are supposedly voluntary but are soon to become mandatory. The Corporate Sustainability Reporting Directive (CSRD) was introduced by the European Union in 2023. It is assumed that its implementation in the legislature of individual member states will lead to – let’s quote: “a radical improvement of existing reporting requirements to increase the transparency of companies’ progress in this area”. To translate this into more understandable language: entrepreneurs running companies in the real estate sector want to be obliged to describe in detail how ESG affects their business with each investment, as well as to inform about the impact of their activities on the environment.
“CFOs are starting to realize that they need to understand how sustainability is communicated because they’re the ones signing off on the reports. We’re going to see a steep learning curve as companies come to grips with what all this really means,” says Slate Asset Management’s head of ESG.
Stranded assets
Paul Stepan, head of sustainability consulting for Europe, Middle East and Africa at JLL, who works with owners of large building portfolios on strategies to improve their resilience to impending climate factors, warns:
– We are now at a point where we will see that around half of Europe’s real estate stock (i.e. assets) is ‘stranded’.
It addresses the decarbonization requirements of the Carbon Risk Real Estate Monitor (CRREM) project, which aims to provide an improvement path for buildings to reduce their carbon emissions to be in line with the Paris Agreement. “This will help the industry focus on assets, prompting asset managers to act,” Stepan said.
More expensive loans and insurance without ESG?
“Green assets,” or those that are set to become green, are said to pose less risk to lenders, who are more likely to finance them. According to a 2023 study by consulting firm CBRE among 77 French lenders, 92% of them said that so-called green criteria would be an integral part of their credit decision-making process, “despite the turbulent economic and political backdrop.”
Insurers are also reportedly taking an increasingly demanding approach to ESG. This is being forced, they say, by the rising costs of losses related to weather-related disasters. According to Tom Wilson, CEO of the American insurer Allstate Corporation, quoted in the ULI and Ferguson Group report, the company recorded losses of 2.7 billion US dollars (approx. 2.5 billion euros) in the second quarter of last year due to 42 catastrophic weather events. As a result, it has stopped selling new policies insuring homes, apartments and commercial properties in California against losses related to the deteriorating climate.
Also in 2023, ratings agency Moody’s released a report showing the rise in commercial property insurance costs in the United States, revealing that while retail rent in Miami, Florida, rose by an average of 1.4% between 2017 and 2022, the cost of insurance rose by 7.5%. In Denver, Colorado, where wildfires broke out in 2023, the numbers were even worse – while retail rents in the city rose by 0.4% annually, insurance costs rose by a whopping 9%.
This report is a disappointment
This time, the ULI report is read with disappointment, if not irritation. The Institute is part of the fashionable, clearly externally inspired green trend (which it does not even hide, citing numerous quotes from ESG experts). Even assuming that the largest companies investing in the real estate market (e.g. infrastructure or office investments) will be able to afford all this ESG “fun”, then implementing environmental, social and corporate governance will certainly be too expensive for small and medium-sized entrepreneurs. Especially in the face of the persistently weak economic situation in the eurozone countries, the need to make another significant financial effort (this time related to subsidizing the bottomless pit, i.e. Ukraine), new immigration challenges looming, and the lack of a vision for the development of Europe among Eurocrats – also on the geopolitical map of the world.
Real estate investors should give up on Eurocratic inventions like ESG in this situation. In order to effectively focus on what is their main business and mission.