Surveyors: Environmental Social and Governance (ESG) and Valuation

The direct and immediate impact of climate change and wider environmental issues has been front page news this summer and a key interest for the real estate industry for a number of years.

Global Leaders are currently meeting at the ‘COP 28’ UN Climate Change Conference to discuss initiatives for change. From the perspective of my role at RICS, we have to convert macro level sentiment on climate change into practical information and guidance that our professionals can then apply to the valuation of individual assets and portfolios.

Environmental Social and Governance (ESG) has become a colloquial term to refer to the sustainable characteristics of property but its origin is in company level disclosures. This distinction is important as you can get a ‘round peg in a square hole’ scenario where asset level reporting frameworks are trying to be used to answer corporate level disclosures. Firms are developing systems that resolve this issue, collecting data at asset level, and then overlaying analysis of this to answer company level requirements. Built environment professionals are key in supporting this process but it all comes down to their instructions.

Another factor is the ever evolving financial and non-financial regulation and legislation placing new requirements on everyone in the valuation process from owners, occupiers and professional advisors to lenders and insurers. We have also seen a degree of uncertainty as some legislation, such as the proposed but as yet undelivered reforms around UK Energy Performance Certificates (EPCs).

RICS recognises that valuers have a clear role to play in making appropriate observations about the impact of sustainability and ESG on the value of property. Valuers must not advise beyond the remit of their agreed terms of engagement or outside their expertise and competence and can tell clients where additional advice might be needed. Beyond valuation, other RICS professionals such as quantity surveyors, property managers and environmental risk experts can also advise on better ESG performance.

Participants in the valuation process are sometimes criticised for not doing enough to consider ESG and sustainability issues. My view is that it is a matter of what is actually being asked. Valuations are typically built around three core factors: the asset to be valued, the purpose of the valuation and its basis. To take a very common example, an office block, valued for secured lending purposes on the basis of market value. The valuer will undertake the valuation in accordance with relevant law, regulation and professional standards that apply to the given scenario. Within the constraints of this example, you will be pleased to know they cannot go ‘off piste’ and start giving investment advice about which ESG strategy is best to follow, but they can, if instructed properly support the client around their ESG needs.

Good advice follows good instructions and what RICS Global Red Book standards refer to as terms of engagement. Sustainability and ESG needs and limitations can and should be built in at the earliest stage. In recognition of this, RICS has worked with a forum of the UK’s leading commercial lenders in conjunction with valuers working for all sizes of firm to develop a simple, practical framework for delivering better and more consistent ESG consideration in valuation for the purpose of commercial secured lending, which you can download here. The framework is very simple and was deliberately built around the ‘art of the possible’ focusing on making ESG consideration a routine business as usual issue. The framework focuses on three core areas: Energy performance certification (EPC), green certification/leases and flood risk. It is not an RICS standard and we do not mandate its use for lenders or valuers but we hope it is a building block in the process that we will continue to develop in collaboration with lenders.

This article has been written by Charles Golding, RICS and the opinions and views stated in this article are those of Charles Golding and not Howden Insurance Brokers Limited (“Howden”). Howden is an insurance broker and is not authorised or regulated to advise on ESG and Valuation. Howden shall not (i) owe or accept any duty, responsibility or liability to you or any other person; and (ii) be liable in respect of any loss, damage or expense caused by your or any other party’s reliance on this article.