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LIVE NOW
The Future of Finance Zurich Watch



Green
ESG


UK PROPERTY MARKET NOW COMES WITH A GREEN PREMIUM

In London, climate change is increasingly reflected in how much it costs to buy
or rent real estate.


Photographer: Chris Ratcliffe/Bloomberg
By

Alastair Marsh

+Follow
June 28, 2023 at 10:17 AM GMT


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GREEN DATA DASH

Vereeniging, South Africa
Most polluted air today, in sensor range
+0. 97° C
May. 2023 increase in global temperature vs. 1900s average
-10. 33%
Today's arctic ice area vs. historic average
89%
Carbon-free net power in Brazil, most recent data
$69. 9B
Renewable power investment worldwide in Q2 2020
52, 000
Million metric tons of greenhouse emissions, most recent annual data
0
6
5
4
3
2
0
4
3
2
1
0
0
4
3
2
1
0
.
0
3
2
1
0
9
0
5
4
3
2
1
0
4
3
2
1
0
0
6
5
4
3
2
0
4
3
2
1
0
0
8
7
6
5
4
Parts per million CO2 in the atmosphere
0
3
2
1
0
9
,
0
6
5
4
3
2
0
8
7
6
5
4
0
4
3
2
1
0
Soccer pitches of forest lost this hour, most recent data
Open


In London, climate change is increasingly reflected in how much it costs to buy
or rent real estate. 

Office space in the UK capital that’s classified as “green” by virtue of a
sustainability certification commands a 20% premium over buildings without such
labels, according to data compiled by property broker Jones Lang LaSalle Inc.

More from
Bloomberg green
NYC Air Quality Alerts Return, Flights Canceled: Weather Watch
The State of World Energy Explained in 4 Charts
Funding to Cut Methane Emissions 'Woefully' Short of What's Needed
The Three Biggest Letters in Carbon Removal Are MRV

Richard Manley, chief sustainability officer at CPP Investments, the $570
billion investment arm of the Canada Pension Plan, says these price
differentials are a sign that the corporate push to eliminate greenhouse gas
emissions will soon feed into other asset prices that impact investor
portfolios.

“We’re starting to see now how decarbonization translates into valuation,”
Manley said. CPP has about $50 billion invested in real estate from Brazil to
China, including some green buildings.




Values for London office buildings with a BREEAM certification, which assesses
energy and water use, pollution and waste, were on average 20.6% higher than
those without that accreditation, and rents were on average 11.6% higher,
according to JLL. That’s based on a study of 592 office investments made during
the five-year period ended December 2021. (Data from property adviser Savills
Plc show a similar bifurcation between green and non-green buildings).


GREENER SPACES COMMAND A PREMIUM

City of London office rent per square foot, by Breeam rating



Rents are for Grade A properties only.

Source: Savills

It’s all about demand. The green premium is the direct product of corporate
efforts to cut emissions, Manley said. London is dominated by companies in
services industries such as banking, asset management and law firms—and many of
these companies have made public commitments to reduce their carbon emissions.

“The easiest lever to play with today is a green building,” Manley said. The
result is “we’re seeing a structural shift in demand” for
environmentally-friendly properties, he said.

Still, there is a limited supply of green offices in London. Only about 3,000 of
the current stock fall into this category, according to Knight Frank. That means
the green premium is strong today. 




Over time, as more buildings transition to cleaner operating sources, the green
premium will likely be replaced with a “grey discount,” Manley said. In other
words, instead of rewarding the most sustainable buildings, the market will
start to punish those with the worst environmental credentials.

“I don’t think the market has fully quantified and reflected in valuation the
contingent liability associated with decarbonization,” he said. “We need to
develop a greater appreciation of the actual cost of decarbonization and see how
that translates into valuation.”



And Manley is clear that these trends will play out in most other industries,
too. This isn’t a real estate story per se; it’s about how businesses and
business models will need to adapt for a carbon-constrained world, he said.

Still, real estate is a good place to start since buildings are responsible for
roughly 40% of global energy related carbon emissions.



Even with this looming probability of a re-rating of businesses and securities
for carbon, most assets are still evaluated on “business-as-usual cash-flow
projections,” Manley says. This will have to change, he says, because as
investors digest the costs of decarbonizing a company, they will start to
question the stability of those cash flows given the increased capital
expenditures required to transform the company for a lower-carbon future.



And as investors rethink corporate valuations, the companies themselves will
have to give thought to how they can thrive in the new world. 

“How do I go from the laggard, maybe at risk of losing access to finance, to a
leader more likely to preserve better access” to financing over the next
decade, Manley asks. “I think that will be the dynamic by which we start to see
this translate into pricing and also translate into the underwriting assumptions
and into active management.”


SUSTAINABLE FINANCE IN BRIEF

ESG investing passed a milestone this week as the first ever set of global
reporting standards was unveiled, paving the way for companies across
jurisdictions to disclose uniform climate and sustainability information.  The
voluntary framework, published by the International Sustainability Standards
Board, is intended to reshape ESG reporting norms in much the same way as the
International Financial Reporting Standards did two decades ago. The ISSB
framework will also affect the information companies include in their  financial
reports, so that these better reflect environmental, social and governance
risks.


Tesla Co-Founder Elon Musk
Photographer: Nathan Laine/Bloomberg
 * Goldman Sachs Group Inc. joined a list of brokers turning less bullish
   on Tesla Inc. shares after the electric-vehicle maker’s blistering rally this
   year. 
 * The Republican backlash against ESG investing has presented the industry with
   an opportunity to reinvent itself. At least that’s the view of several ESG
   supporters at a sustainable-investing conference in Boston.
 * But investors in the UK are starting to worry that the GOP’s anti-ESG
   movement may get a foothold on its side of the Atlantic.





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