ESG: The Valuer’s Moment Has Arrived

It is an exciting time to be a real estate valuer.  With the ESG agenda having taken centre stage across virtually every facet of both business and daily life, it is beyond doubt that valuers can – and must - play an important role in enabling and effecting change.

To date, pointing the finger at valuers in the quest to see ESG recognised “in the numbers”, has been rightly responded to that the core role of the Valuer is as a “score-keeper” rather than a “score-maker”.

In other words, the phrase serves as a reminder that valuers have no mandate to bring personal prejudices to bear when expressing an opinion of Market Value – or Fair Value.  To date, pointing the finger at Valuers in the quest to see ESG recognised “in the numbers”, has been rightly responded to that the core role of the Valuer is as a “score-keeper” rather than a “score-maker”.  In other words, the phrase serves as a reminder that valuers have no mandate to bring personal prejudice to bear when expressing an opinion of Market Value – or Fair Value.  The definitions of Market Value and Fair Value essentially require a valuer to dispassionately consider what the highest or best bids received from the market by an asset owner, who in turn is a willing seller, will be.  Author of the recent RICS Review of Investment Valuation, Peter Pereira Gray, refers to such an opinion as an assessment of an “exchange price”.  However, another way of viewing this “process” is that a valuer must effectively step into the shoes of the hypothetical purchaser – and it is through this lens that the activities required of a valuer in respect of ESG can be seen to be evolving at pace and also where it is clear that a Valuer does indeed have a role to play in a world where ESG has taken centre stage.

In the case of real estate held for investment purposes, value is of course “created” through its ability to deliver a rental income stream.  The quantum of value is effectively a judgement as to the risk profile attaching to that ability to deliver, maintain and grow the income stream.  Recognition of the ability for ESG related factors, such as energy efficiency, physical risks including flood or over-heating and transport connectivity through to measures that influence occupant wellbeing to influence that risk profile is now embedded across swathes of the real estate investment market.  Indeed, not only is it recognised, but disclosure of approach and exposure is increasingly a pre-requisite of their various stakeholders – whether that be an investor’s own investors, lenders, regulators or market analysts.

The latest RICS Valuation Guidance Note addressing Sustainability and ESG issues within commercial real estate became effective on 31 January 2022.  At its heart, the Guidance Note seeks to aid valuers in identifying and addressing ESG and Sustainability factors as they form their judgements.  But so too does it raise the requirements placed on valuers to explicitly recognise the influence such factors have had on informing their judgements through commentary within valuation reports.  The evidence base to provide empirical support as to the impact of ESG and Sustainability related factors is recognised to be limited (at best). Indeed the Guidance Note does not require or expect valuers to apply explicit adjustments within their valuations – unless evidence to do so demonstrably exists within the market pertaining to the asset under consideration such as identifiable capital expenditure to address minimum energy efficiency regulatory requirements or flood defence risks.The Guidance Note does however require valuers to “qualitatively” articulate the perceived risk profile of the asset.  In so doing, the expectation is that the recipients of valuations will be able to take a better informed view of an asset’s risk profile….and in due course create the evidence upon which valuers will consider when forming their judgements.

This approach to disclosure and “transparency of thought” is consistent with the tightening aims and expectations of regulatory disclosure initiatives such as that set out by the Taskforce for Climate Related Disclosures and the EU Taxonomy related Sustainable Finance Disclosure Regulations. Indeed, the importance of this approach is reinforced by the following quote from Rt Hon Rishi Sunak MP, Chancellor of the Exchequer:

"Investors and businesses must have the information they need to understand the full range of environmental risks they face and create. That information should be a key component of every investment decision and the strategy of every business. Climate and environmental considerations should be central to the decision making process..."

Unsurprisingly, the valuer’s toolkit needs to evolve to respond to this shift in market dynamic.  Requesting and considering a range of benchmark information such as BREEAM, LEED or NABERS, alongside Energy Performance Certificates to review Minimum Energy Efficiency Standards associated risks are examples.  So too, increasingly, will be an affinity with tools such as the Carbon Risk Real Estate Monitor (CRREM) which seeks to provide visibility on decarbonisation risks associated with achieving commitments contained within the Paris Agreement.  Importantly, valuers are not, and nor will they be, Sustainability or ESG Experts; just as they are not Building Surveyors, Contaminated Land experts or Town Planning specialists.  However, as with absorbing and interpreting the insight from Building Surveyors, Contaminated Land experts or Town Planning specialists to consider the likely reaction of market participants, their role does now extend to the consideration of how Sustainability and ESG related information may influence the valuation of assets within their area of expertise.

So, the stage is set in 2022 for valuers to genuinely embrace Sustainability and ESG, to engage in the agenda and to refine approaches accordingly.  Having weathered the uncertainty storms of the global financial crisis and the Covid pandemic, ESG & Sustainability is now the priority.