INREV research report highlights importance of consistency in ESG data

Authors
Constantin Sorlescu, Director of Professional Standards and Sustainability, INREV
Gina Ding, Head of Public Affairs Europe, RICS

The real estate industry has been steadily embedding sustainability into its investment strategies, reflecting net-zero targets, green building certifications and sustainability-linked financing. RICS Valuation – Global Standards (Red Book Global Standards) now makes the ask of valuers explicit: environmental and sustainability factors must be considered and, where relevant, reflected in value.  Yet when it comes to understanding how sustainability factors actually influence asset values, the picture is far less clear.

The bar has been raised. The foundations haven’t

For valuers, the challenge is a structural one. Red Book Global Standards and the growing body of regulatory disclosure requirements across Europe have raised the bar – but the data and definitions needed to apply ESG factors consistently in valuations are still catching up with this new reality.

What is standard practice in one national jurisdiction may be nascent in another, and this makes consistent application of sustainability considerations in valuations more challenging.

The inconsistency runs deeper than geography. Even fundamental terminology is not yet applied uniformly across practitioners such as valuers within the same local market. Physical climate risk is one example: different valuers may be categorising the same hazards differently without realising it, producing valuations that are not meaningfully comparable. A similar issue arises in the valuation of solar PV, where income and cost treatment vary between firms.

The evidence is building – but so are the gaps

INREV's two-phase Environmental Considerations in Underwriting industry project has tested real-life assets in the office, logistics, residential and retail sectors using a discounted cash flow framework. The research found that energy efficiency showed the clearest and most traceable link to payback and value. However, isolating the financial impact of environmental interventions from broader market forces proved stubbornly difficult.

Although the evidence base is building, inconsistent interpretation and application of ESG factors and unclear definitions continue to limit the profession's ability to reflect environmental factors reliably.

Valuers cannot lead the market; they must reflect it. But they can, and should, be more consistent in how they engage with the data that does exist.

Developed with significant input from INREV and other key industry stakeholders and aligned with the INREV ESG Standard Data Delivery Sheet (SDDS) – the reporting language of the real estate investment management industry – the RICS ESG data list provides an agreed set of indicators for valuers to collect and analyse. Along with INREV’s Property Valuation guidelines, RICS’ Red Book Global Standards and RICS’ recently published global standard ESG and sustainability in commercial property valuation, these provide a structure for embedding environmental data consistently into valuation outputs.

Market participants adopting these tools more widely would ensure that environmental data is reported transparently and in a form that valuers can analyse, benchmark and apply in a consistent manner.

Closer dialogue at the outset of the valuation instruction, including the underwriting stage, also benefits both valuers and clients, producing better inputs and more defensible outputs. It helps valuers comply with the Red Book Global Standards requirement to disclose whether, and how, environmental factors have been reflected in valuation reports.

The long game

Standardisation takes time. The analytical groundwork is in place, but no single paper, framework or piece of guidance will close the gap overnight. RICS and INREV are jointly committed to the goal of ensuring all valuers can account for environmental factors reliably, comparably and transparently.

This recent research suggests that tools such as the RICS ESG data list, Red Book Global Standards and the INREV ESG SDDS, can help achieve this goal, along with sustained collaboration between valuers, investment managers, investors and financial institutions with a collective will to make it happen across every market and real estate segment.