RICS Guidance Note - ESG & Sustainability in Valuation: BBP Member Blog: Tom Crowe, Senior Real Estate Investment Analyst, Abrdn

10/02/2022

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The RICS have recently released new global guidance, which came into effect from 31 January, outlining best practice for valuers to follow when approaching ESG considerations within valuation exercises. Tom Crowe from BBP Member Abrdn outlines their reaction to the guidance in the following short blog.

"In summary, the RICS guidance note sets out that a valuer is now able to consider building obsolescence, capex requirements and carbon emissions when approaching any appraisal. Ultimately allowing for ‘brown discounts’ to be applied to secondary assets which are deemed to fall below current/future regulations. There is no doubt that ESG factors are becoming paramount in occupier and investor thinking and the RICS is therefore attempting to ensure that this is accurately accounted for in any valuation exercise.

However, as the RICS seeks to assess and not lead markets, the guidance maintains that transactional evidence must be considered when adjusting values. In our view, there continues to be a shortage of evidence demonstrating the existence of either a ‘brown discount’ or ‘green premium’ and, as a result, the guidance note provides a rather ‘flexible’ framework. Initially, it is to be expected that a valuer’s ability to account for ESG factors will be limited, principally due to a lack of available market evidence. The likely outcome, therefore, is that the market will naturally adjust for ESG considerations based on transactional evidence, investor sentiment, further regulations and their associated costs.

Whilst we do not feel this will therefore result in a ‘cliff edge’ situation, with values dropping overnight, we do see this as a first step in the process to more adequately reflect ESG considerations in asset values. The guidance is modest, but it does indicate a direction of travel and a positive step change for the industry. Whilst ESG considerations have been a factor in investor thinking for some time, it is our view that this guidance is a first of many steps that will accelerate the incorporation and adoption of ESG best practice and consideration of climate related risks within the wider industry."

Written by Tom Crowe, Senior Real Estate Investment Analyst, abrdn.