PROPERTY JOURNAL

Climate-related disclosures and real estate

Harnessing Task Force on Climate-Related Financial Disclosures recommendations is now commonly required to mobilise capital for listed real estate to fight climate change as it becomes increasingly demanded by investors

Author: Hassan Sabir and Gloria Duci

19 August 2020

In recent years, investors have been increasingly keen to channel their capital into companies that are actively managing climate risks. In the real estate industry, this has resulted in increasing scrutiny over its commitment to reducing carbon emissions and, for the listed real estate sector (LRE), in particular, environmental, social and governance (ESG) data disclosure has since become critical to the property industry’s investor relations conversations.  

For this reason, in 2011 EPRA created the Sustainability Best Practice Recommendations (sBPR) reporting framework, which gave the LRE sector a set of standards by which property companies could be compared fairly against one another on their ESG performance. The standards have been well received by the industry and investors, and we have seen consistent uptake from our members, who are keen to show their good work in this space.

But when it comes to reporting climate risk specifically, and its implication on financial performance, we are seeing an increasing demand for climate-related information from the investment community. As proof of this, in 2017, the investment community came together to develop Task Force on Climate-related Disclosures (TCFD) recommendations

This is critical for anyone advising on or executing information disclosure in the sector. The growing importance of these metrics cannot be ignored. Over 350 investors with nearly US$34tr in assets under management have backed the recommendations, alongside 800 private and public sector companies and 36 central banks and supervisors. Soon, property companies that do not report against these may fall behind in their conversations with investors.

Yet TCFD reporting has been difficult to accommodate for many businesses, as climate-related disclosure also requires an integration into formal risk management, governance processes and business financial planning. Therefore, EPRA has developed Enhancing Transparency with the TCFD guidance. The report serves as a practical guide for the industry which shows examples of businesses who have done this well  and their approach to integrating climate assessment, monitoring and management into business activities.

These practices vary to some degree depending on an organisation’s specific characteristics, including its size, structure, and operating context. Furthermore, this guide, which is primarily focused on disclosure, aims to help companies to remodel their existing sBPR reporting to make it fit for purpose for TCFD reporting.

Ultimately, we are trying to enable more of our membership, and the wider real estate sector, to comply with the TCFD recommendations in the most efficient way possible. A more transparent sector is a more attractive sector to investors, and a more comparable landscape can only lead to increasingly impactful ESG and climate action in listed real estate. More common implementation of TCFD reporting can be a key driver in this, and so uptake is extremely important.

"A more transparent sector is a more attractive sector to investors"
Critical step for real estate

The very fact that TCFD recommendations were developed demonstrates that the investment community was abundantly aware of the risks posed by climate change a long time ago. Investors have shown they want to be able to assess companies’ climate-related governance, strategy, risk, and metrics, as this is what allows them to better understand the risk associated with their investments. Implementing the recommendations therefore allows real estate players to show that they are in a position to respond to and manage climate risks in the short, medium and long term. It is a critical step in making the sector more attractive to long-term investors and more competitive as an asset class.

The current COVID-19 crisis has only served to elevate the importance of sustainability commitments. On one hand, it’s clear that both this pandemic and climate change have their roots in the world's current economic model, on the other, this crisis demonstrates that quick and sweeping actions are possible. Governments, international institutions and businesses have to urgently play their part in the fight against climate change.

And for the listed real estate sector, large-scale mobilisation of capital is necessary in order to transition to a low-carbon future. Yet only the disclosure of transparent and consistent information on climate-related risks and opportunities will drive this capital into the sector. This is not a compliance issue, but a critical operational imperative.  

Considering the ongoing economic uncertainty as a result of COVID-19, the need for new capital may be greater than ever as the industry considers if, and how, it must adapt to a society undergoing great change. Much of Europe is currently experiencing a significant economic downturn, so the commercial property industry’s role in promoting growth is vital. We cannot, therefore, view improving the transparency of reporting and the sector’s recovery and growth as independent of one another. The former will be essential to the latter.

"The current COVID-19 crisis has only served to elevate the importance of sustainability commitments"
RICS sustainability initiatives

RICS is working to champion the importance of environmental and social governance in the built environment through a variety of projects and programmes, both its own and as a partner in international collaborations. In April 2020, RICS became the first built environment body to become an official supporter of TCFD. 

Value the Planet – a campaign launched by RICS to promote the preservation of the planet through the implementation of the UN's sustainable development goals

The World Built Environment forum – RICS brings together leaders from across the world to advance discussions of critical importance to the built and natural environment, inspiring positive and sustainable change for a prosperous and inclusive future.

EU Taxonomy  – this classification system creates a common language between companies and investors, providing confidence that investments are having a positive environmental impact.

As a member of the Technical Expert Group, RICS led the built environment strand of the work, helping define what is 'green' for the buildings sector – a recognition of RICS’ extensive body of work on sustainability at a global level.

Long-term view

It is important, however, that companies take a long-term view when it comes to adopting the TCFD recommendations. Companies must look to integrate climate risks and opportunities into their business strategy, and the reporting process can be fundamental  in this. This means investing in the appropriate resource to ensure that reporting is prioritised and done properly.

Climate change/related risks will be at the forefront of investors’ thinking for many years to come. Through this guidance, we can help to build a common way for the sector to report on climate-related issues that can demonstrate the true value of the listed real estate industry during these times of change.  

h.sabir@epra.com

g.duci@epra.com

Relevant competencies include: Investment management, Property finance and funding, Sustainability

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