Key Drivers of Sustainable Finance in 2024

Sustainable finance has been driven by bottom-up pressure from consumers and employees, top-down pressure from governments and regulators, and from the market itself which is realizing both the need for and value of sustainability in asset management. With the intersection of these pressures, the appetite for sustainable finance has grown. According to PWC, the sustainable finance market grew to $1.6tn in 2021[1]. And despite the recent economic downturn, sustainable finance looks set to continue growing in the years ahead. In this piece, I will provide insights into the top-down and market factors driving sustainable finance – and why it matters.

Top-down pressures

It is fundamental that capital markets embrace sustainability and start to take on the initiative by integrating ESG into decision-making. But the markets are not moving fast enough – at least that’s what governments think. As such, legislators have stepped in to establish requirements and targets designed to spur the financial sector into action and to help meet sustainability objectives.

Governments around the world have set ambitious net zero (Paris Climate Agreement) and sustainability targets (e.g. UN Sustainable Development Goals). However there is a significant funding gap to achieve these goals, and it’s up to real assets managers to address this gap. The European Commission (EC) has estimated that €275bn is needed in additional investment for the commercial real estate sector in order to reach the EU’s goal to achieve a 55% carbon reduction target by 2030. The UK also has a net zero target, and the government has set out its approach to achieving this target in its ‘Greening Finance: A Roadmap to Sustainable Investing’. The UK government knows that sustainable finance will be crucial to achieving this target, and a principal way to achieve this will be to apply top-down pressure on the financial markets. The two primary pressure points are introducing standards at the real asset investment level, and reporting requirements at the fund and firm level.

Governments around the world have stepped in to create conditions and minimum standards in the commercial real estate sector to ensure that real estate activities are conducive to a better planet. Nearly Zero-Emission Building (NZEB) and Minimum Energy Efficiency Standards (MEES) are just two examples of requirements imposed on constructions and standing assets with the goal of achieving net zero. When you consider that real estate is accountable for nearly 40% of global energy-related emissions the importance of transitioning existing buildings to low carbon cannot be overstated. Regulations and standards are pushing asset managers to make greater considerations regarding the impact and performance of their building stock, and channel capital towards promoting environmental and social measures.

Regulators are increasingly focused on reporting requirements for firms and asset managers. The motive is to minimize greenwashing and promote transparency in the financial sector, with the overarching goal to help channel capital into sustainable investments. We are seeing this in the EU with the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the UK’s Sustainable Disclosure Requirements (SDR). Additionally, the EU has brought in the Corporate Sustainability Reporting Directive (CRSD) which requires companies to report on their governance practices, risk management and impact on a broad range of sustainability matters. More now than ever, there is a level of reputational risk associated with not aligning with sustainability-related disclosures and reporting requirements, especially as the regulatory landscape continues to evolve at pace.

It must be stressed that reporting isn’t being done for reporting’s sake. Governments are aware that encouraging investors and asset managers to gather, monitor and report information about their investments will empower investors and asset managers to make better, more sustainable choices. Not only does this benefit investors – who are able to make more informed decisions about the allocation of their capital – but will benefit asset managers who, through reporting, will come to have a greater understanding of their investments and the impacts of their capital. The hope is that this information will empower the financial sector to embrace sustainable finance and integrate ESG into decision-making.

As a result of increasing reporting requirements, real estate investors are facing mounting stakeholder pressures to monitor and report sustainability data. EVORA Global recognizes that there is a significant data gap, stemming from the difficulties of gathering, validating and interpreting sustainability data. Our sustainability data platform SIERA is designed and developed to address this issue, helping investors to meet compliance and performance requirements and gather valuable insights about their assets. The market must now step up and adopt better data monitoring and reporting practices and utilise the tools and services available in the real estate space.

Market pressures

Increasing top-down pressure from governments has tightened the screw on the financial sector. But without the market taking an active role, these pressures would be less effective. EVORA has been pleased to see the market embrace sustainability. Notably, many prominent investors are defining ESG criteria as a prerequisite for accessing capital, requiring funds to adopt sustainability measures, report on a range of ESG metrics, and bolster their good governance practices. This is especially the case in Europe, where investors are now expecting asset managers to align to SFDR and report under Article 8 or 9, or at the very least integrate sustainability considerations into their decision-making. In terms of fundraising, there is both a risk associated with not integrating sustainability into asset management thus closing fundraising opportunities, and an opportunity in integrating sustainability and gaining access to a pool of capital that was previously unavailable.

In a similar vein, EVORA has noted an increasing number of cases in which firms and asset managers are put under pressure by their investment partners, who as part of their due diligence or policies must vet potential partners’ sustainability credentials. EVORA has positively contributed to this by supporting our real estate and infrastructure clients across debt and equity strategies, putting in place ESG-related questionnaires, scorecards, policies, and procedures to support ESG integration. Similarly, we have helped on the other end of this process, with clients approaching EVORA to put together an ESG strategy that meets or exceeds their partners’ and the wider markets’ expectations. This sort of collaborative effort and influence is fundamental to galvanizing action in the financial markets, with no firm wanting to be perceived as being ‘left behind’ by their peers and partners.

Finally, it would be amiss to not mention the financial benefits of sustainable finance. You are probably familiar with the concept of ‘brown discounts’ and ‘green premiums’. If not, brown discounts stem from the depreciation of assets that are deemed ‘unsustainable’, commonly associated with their environmental performance particularly in relation to net zero and the risk of ‘stranding’. On the other hand, green premiums stem from high-performing assets that have strong environmental and/or social credentials that can yield higher rent, evaluations, and typically cost less to operate. These concepts have sprung from the market recognizing that there is inherent value associated with sustainability and unignorable risks associated with inaction.

On the debt side, many lenders are realizing the sustainability performance of loans can materially impact the borrowers ability to repay the loan. EVORA are seeing more lenders introducing ESG criteria into their lending practices, with the purpose of minimizing their exposure to risks and identifying opportunities where capital can be made available to improve the performance of the real asset. In doing so, this can help secure the value of loans. So much so, that it is increasingly common for European lenders to both include ESG requirements in their loan terms and to offer financial incentives to borrowers for achieving predetermined sustainability performance objectives.

Final Thoughts

Between work, home and our other daily activities, people spend the majority of their day interacting with the built environment. It is undeniable that the built environment matters to both people and the planet. The real estate and infrastructure industries are energy and resource-intensive and are central to the transition to a net zero economy, and the importance of health & wellbeing and social value is clear. It is thus fundamental to fund the improvement of existing inefficient building stock, and where we cannot renovate or uplift existing stock that new constructions are sustainable and will serve us for decades to come. This will only be achieved through sustainable finance.

Don’t get left behind. See how our team can help drive your investments forward in a sustainable way.

Jamie Anderson, Junior Sustainability Consultant, EVORA Global

[1] pwc.co.uk/services/business-restructuring/insights/financing-sustainable-growth-emerging-opportunity.html