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What does the rise of Environmental, Social and Governance reporting mean for real estate investors when there is no internationally recognized standard approach? And what changes are expected in the months and years to come?

One of the main objectives of COP 26 in November was to align investor behavior with the ambition of the Paris Agreement COP 21 to limit global warming to 1.5 degrees. PRI (Principles for Responsible Investment), founded by leading institutional investors in 2006.

The PRI had stated prior to COP 26: “As COP26 approaches, the PRI and their partners are working with actors across the institutional investment chain to make credible net zero commitments. A key element in this regard is the adoption of the recommendations of the Financial Stability Board Working Group on Climate-Related Financial Reporting (TCFD). In the United Kingdom, regulations are underway for this.

A Financial Conduct Authority (FCA) consultation, CP21 / 17: Enhancing Climate-related disclosures by Asset Managers, Life Assureurs, and FCA Regulated Pension Providers closed on September 10, as did a parallel consultation, CP21 / 18: Enhancing climate-related disclosures by standard listed companies and seeking views on ESG topics in capital markets. The UK Department for Work and Pensions (DWP) also introduced new provisions to integrate TCFD into pension funds, which began to come into force on October 1.

Real estate concerns

The proposed FCA rules are of particular concern to the real estate industry, as the provisions are not really designed for real estate as an asset class. This is important for the real estate industry, as fund managers fall under the definition of asset managers. Life insurance companies and pension funds are also major investors in real estate as an asset class. The challenge is that the UK proposals, and the TCFD recommendations that they follow, were drafted with investments in securities, especially listed securities, in mind and were largely impractical for real estate as an asset class.

Responses from the real estate sector to the UK consultation suggested that the FCA (and therefore the TCFD) should use an existing real estate methodology for real estate measures. The broad consensus is that the most appropriate tool for this is the Carbon Risk Real Estate Monitor (CRREM). Following discussions with the FCA, the TCFD secretariat has retained the proposals and considers them to have at least the potential to be the overall methodology.

It should be noted that the UK requirements under PC 21/17 only apply to the largest investment managers. The first phase is aimed at asset managers with assets under management (AuM) exceeding £ 50 billion and applies from 1 January 2022. Phase 2, which applies one year later, concerns companies with AuMs over £ 5 billion. The new rules will not apply to companies with assets under management of less than £ 5 billion on a rolling three-year basis. However, smaller managers may find themselves drawn in if their investors are caught, and once a methodology is established as real estate industry best practice, the pressure will increase on others outside the regulatory scope to follow.

The ICAEW hosted a free webinar on this topic and on ESG for real estate more generally on October 20.

Since the webinar, there have been a number of additional developments:

  • On October 21, the UK DWP released a consultation “Climate and Investment Reporting: Setting Expectations and Empowering Savers”, which runs until January 6. Organizations in the real estate sector will respond to the consultation;
  • On October 22, the EU released the revised Regulatory Technical Standard (RTS) for the Sustainable Finance Disclosure Regulation (SFDR);
  • On November 3, at COP 26, the directors of the IFRS Foundation announced the creation of a new standards board, the International Sustainability Standards Board (ISSB). This is likely to be particularly relevant to ICAEW members.

ICAEW will be hosting a follow-up webinar on ESG reporting for real estate early next year.

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