Step Forward for Investable Green KPIs in Real Estate
Unlocking private finance flows to decarbonise European real estate requires increased alignment of metrics with regulation.
Greater harmonisation of sustainability metrics is needed to scale private investment in the decarbonisation of Europe’s building stock, according to a group of industry bodies.
The Aligning Real Estate Sustainability Indicators (ARESI) working group has published a white paper which aims to better align investors’ efforts at measuring the sustainability of their real estate investments with climate transition-focused key performance indicators (KPIs) in European legislation.
“Decarbonising buildings is difficult and will require significant investment – around US$600 billion annually from now until 2050,” Hugh Garnett, Real Assets Senior Specialist at the Institutional Investors Group on Climate Change (IIGCC), told ESG Investor.
“This will require a rapid scaling of private finance, which means barriers preventing that investment need to be addressed. [The ARESI group’s] work looks at the regulatory barriers – with a focus on Europe – and the overcrowding of climate indicators and metrics across both voluntary and regulatory disclosure frameworks.”
The white paper has identified ten core sustainability indicators already used by financial institutions that can be prioritised by investors to sufficiently measure the climate-related performance of prospective and existing real estate assets, in line with regulatory expectations.
“Real estate investors often struggle with data availability, comparability and reliability, which makes it difficult to integrate these factors into financial modelling and investment decisions,” said Erik Landry, Director of Climate Change at GRESB, a provider of ESG assessments and sustainability benchmarks for commercial real estate and infrastructure.
By streamlining sustainability metrics, the ARESI working group hopes to facilitate more standardisation and comparability across real estate investments, which will, in turn, aid the generation of consistent and high-quality data.
Indicators have been selected from existing European regulatory frameworks, including the Sustainable Finance Disclosure Regulation (SFDR), EU Taxonomy, and European Performance of Buildings Directive (EPBD).
“The industry debate about the heterogeneity of real estate sustainability criteria has been going on for years,” said Paul Richards, CEO of the Association of Real Estate Funds (AREF).
“It is moving in the right direction, with improvements all the time, but this valuable piece of work should expedite the conversation.”
The ARESI working group includes the IIGCC, AREF and European Public Real Estate Association (EPRA). It aims to provide a neutral forum for discussing alignment in real estate sustainability investment indicators, develop temporary solutions to address existing ambiguities, and promote the consistent calculation and disclosure of indicators to alleviate reporting burdens without mandating its application.
Climate first
As a priority, the group has chosen to first focus on climate transition indicators, recognising that these are the most developed and commonly used in European real estate finance.
“By proposing ten core [climate] indicators, ARESI seeks to improve clarity and comparability in reporting,” said Hassan Sabir, Finance and ESG Director at EPRA.
“As part of our advocacy outreach, EPRA remains engaged in these discussions to help ensure practical and consistent ESG reporting standards for the industry.”
The selected core sustainability indicators include the zero-emission building metric, alongside exposure to fossil fuels through real estate assets, renovation of existing buildings, construction of new buildings, and exposure to energy inefficient real estate assets.
2024 research found that global real estate assets are exposed to an estimated US$559 billion in growing climate-related risks.
In addition, around 36% of the EU’s total emissions from its energy mix come from the bloc’s built environment.
The EPBD, which entered into force in May 2024, aims to improve the energy efficiency and sustainability of the EU’s built environment. It targets a 60% emissions reduction in the bloc’s building sector by 2030, achieving full decarbonisation by 2050.
“Many investors continue to rely on benchmarks and reporting structures to guide decision-making, but the lack of universally accepted ‘investable’ KPIs that are perhaps more useful in directly influencing financial decisions – such as valuations and investment committee discussions – remains a hurdle,” said GRESB’s Landry.
“Initiatives like ARESI are helping to further bridge this gap by refining such key indicators.”
GRESB this week introduced ‘Score Contribution’ – a voluntary membership tool designed to give real estate managers greater insights into how individual assets contribute to an investment portfolio’s overall sustainability score.
As a next step, the ARESI group will engage with stakeholders on adopting its proposal and with regulators on appropriate and ambitious sustainability regulation. Its future work will potentially expand to other impact reporting categories.
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