Posts

A brief history of materiality and ESG at the SEC

/in /by

It is interesting reading the comments [1] to the proposed ruling by the US Securities and Exchange Commission (SEC) on The Enhancement and Standardization of Climate-Related Disclosures for Investors [2]. Points raised are diverse, but broadly fall within one of two camps; those vehemently opposed to the ruling, and those in support (often calling for more ambitious requirements over and above the proposal from the SEC). This binary grouping is neither surprising nor unexpected for the SEC, given the organization’s four-decade history of contests concerning environmental proposals. [3]

And now in 2022, the SEC is proposing extensive new disclosure requirements for publicly listed firms starting in the fiscal year 2023 (for filing in 2024) for the largest filers – those with a public float greater than $700m – with phased introduction for firms with smaller public floats.  The first compliance date will impact around 2,000 businesses and eventually impact approximately 7,000 in total. The requirements require registrants to include certain climate-related information in registration statements and periodic reports, such as on Form 10-K, including:

  • Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook
  • Climate-related risks and relevant risk management processes
  • Greenhouse gas (“GHG”) emissions
  • Climate-related financial statement metrics
  • Climate-related targets and goals, and transition plan, if any.

The disclosure requirements are centered around the recommendations from the Taskforce on Climate Related Disclosures (TCFD). The SEC joins eight jurisdictions that have TCFD-aligned official reporting requirements, (Brazil, European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom). Additionally, the International Financial Reporting Standards (IFRS) Foundation announced a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.

What is TCFD?

As a high-level summary, the TCFD recommendations provide a framework for businesses to identify, evaluate, manage and monitor climate related risks and opportunities. They are centered around four themes, with a total of 11 recommended disclosures.

  • Governance – what role do people play in managing and overseeing climate related issues?
  • Strategy – how will organizations change to manage future climate-risk?
  • Risk Management – what processes are in place to identify, manage and assess risk?
  • Metrics and Targets – how do you measure progress against climate-related goals?

Globally, there are over 3,400 TCFD supporters, although not all of these have disclosed in full yet. The TCFD 2021 Status Report [4] provides a breakdown of public reporting against each of the recommended disclosures; the Materials and Buildings sector captures commercial real estate, although the 404 firms reporting will not be exclusive to the buildings sector. 

The results suggest that:

  • Most firms are disclosing qualitative risks and opportunities – per Recommendation: Strategy a)
  • Materials and Buildings have highest level of Metrics and Targets disclosure
  • Scenario analysis is disclosed by only a small percentage of firms  – per Recommendation Strategy c)
  • Governance, including Board and Management oversight of climate risks and opportunities, is the next least well disclosed theme after scenario analysis – per Recommendation: Governance a) and b)

On the latter point, gaining Board buy-in and a commitment to climate-related topics is essential for strategies and risk management processes to be truly integrated. Without this, firms will be disclosing under the TCFD framework for compliance reasons only – a missed opportunity.

Disclosure rates against the 11 recommendations differ by region, with Europe leading over the period from 2018 to 2020.  Double digit increases over two years were seen across all regions, with the exception of North America, which also has the fewest percentage of firms disclosing against the 11 recommendations. The takeaway from these numbers is that the SEC is leap-frogging the comfort zone for many North American firms.

GHG data and data quality

The proposed SEC ruling requires registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2) to be disclosed in absolute terms (by Scope) and as an intensity metric. Scope 3 emissions – of which there are 15 categories covering indirect upstream (i.e. related to goods or serviced purchased) and downstream (i.e. related to goods or service sold) – are, receiving a lot of attention due to the fact that Scope 3 emissions are out of direct control of landlords and data quality and coverage is often poor. Aside from small reporting companies, Scope 3 needs to be reported from FY 2024 (filing in 2025), if material.

Defining materiality is not an exact science and the lack of guidance from the SEC may result in reporting opt-outs where Boards deem the organization’s emissions to be immaterial to investor decision making. However, the quantity of emissions (tons CO2) is one method of determining materiality; the Science Based Targets Initiative (SBTi) sets a threshold for materiality as 40% of Scope 3 in relation to Scopes 1 and 2. Other factors influencing materiality need to be considered, such as:

  • Risk – considering relevant climate-related legislative and reputational risks
  • Influence – the registrant’s influence over emissions generation and reductions e.g. percentage ownership and / or a board representation within investee companies
  • Financial – emissions associated with a high level of spend or those generating a high level of revenue.

Many of these factors will need to be considered on a case by case basis, particularly legislative risks, which will need to be considered country by country and at the city level in many instances. For large-accelerated and accelerated registrants there are additional requirements, which will have ramifications for the entire real estate industry, for limited assurance (phased introduction from 2024 for filings in 2025) and the more stringent reasonable assurance (phased introduction from 2026 for filings in 2027).  While public REITs [5] are clearly in the SEC’s crosshairs, so too are others in the real estate value chain. For example, lenders (of both debt and equity investments) will need to report their share of Scope 3 financed emissions – most likely following PCAF [6] guidance.  Similarly, corporate tenants will want to understand their upstream GHG impacts where energy is provided as part of a service e.g. where a landlord procures energy in a building and recharges costs to tenants. The proposed rules will surely impact both contractual lending and leasing agreements on data provision and, importantly, the underlying quality of that data.

Transition plans

Scope 3 emissions also need to be disclosed in a filing if a registrant has made a transition plan (decarbonization target) public that includes Scope 3. For real estate, it is common to see leaders in ESG set net zero carbon targets that include Scope 3, but this is often ringfenced as tenant energy use. As the table below indicates, there are other Scope 3 emissions that may be materially relevant beyond tenant energy use, including embodied carbon of new construction and refurbishments. How the industry responds to this requirement will be interesting to watch. REITs that understand their full Scope 3 position will be able to retain existing climate goals. Those who do not will need to get to grips with Scope 3 accounting, or be forced to take down public goals, or walk back their scope accordingly – neither action is likely to be viewed as favorable to investors that see climate risk as an investment risk.  

Source: Adapted from UKGBC: Guide to Scope 3 Reporting in Commercial Real Estate [7]

A transition plan is used to lay out actions and targets that demonstrate an entity’s pathway toward a low-carbon economy, through reducing its absolute and / or intensity-based GHG emissions or concerning exposure. There are many frameworks that set out characteristics of an effective transition plan. This includes broad industry frameworks such as UN Asset Owners Alliance, through to more sector specific guidance used by signatories of the Net Zero Asset Managers Initiative issued by the IIGCC, and more besides. 

Unlike the frameworks named above, the SEC proposed rule does not provide sufficient guidance on the characteristics of an effective transition plan. For example, this may include disclosure of:

  • Base year, target end year and importantly, interim target year(s)
  • Climate scenario considered (e.g. 1.5C, 2C, 3C)
  • Type of target (e.g. absolute or intensity based)
  • Coverage and scope of the target, including narrative on any carve-outs
  • Alignment with recognized and suitable frameworks

Without specific disclosure requirements, there is a risk that transition plans may not be comparable nor decision-useful for investors – a concern raised by many commentators.

Lastly, but certainly not least, a new Article 14 to Regulation S-X would require a registrant to disclose climate-related financial metrics relating to severe weather events and other natural conditions and / or transition activities.

These financial metrics must be presented on an aggregated line-by-line basis for all negative impacts, and separately, all positive impacts where the impact is greater than 1% of the line item. If collecting Scope 3 data appears challenging, collating these financial metrics will present a gargantuan task for many registrants. Once the data is held, registrants will then face the effort of contextualizing the metrics so they don’t unduly scare investors.

Final thoughts

Overall, the SEC has moved from zero to one hundred in some incredibly far reaching, and challenging, requirements. The proposed rules lack clarity in a number of areas and will surely be revised before final issue. However, I do expect the rules to be materially similar when the final form is issued, with my prediction being year end.

Once introduced, the challenge for registrants is to view the rules “beyond compliance” and embrace the TCFD framework as a pragmatic methodology for climate change preparedness and resiliency. This mindset is essential if the US (and the world) are to achieve a just and orderly transition to a net zero economy. 

[1] https://www.sec.gov/comments/s7-10-22/s71022.htm

[2] https://www.sec.gov/rules/proposed/2022/33-11042.pdf

[3] The Commission first addressed disclosure of material costs and other effects on business resulting from compliance with environmental law in a 1971 Interpretive Release.

  • The 1971 position took two years to codify and reached the final and current form in 1982, after a decade of evaluation.
  • In 1975, the Commission also concluded that it would require disclosure relating to social and environmental performance “when the information in question is material to inform investment”.
  • In 2010 SEC guidance specifically emphasized that climate change disclosure might, depending on the circumstances, be required in a company’s Description of Business, Risk Factors, Legal Proceedings, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
  • In 2016, the SEC issued a Concept Release regarding the modernization of regulation S-K including on climate change, noting the growing interest in ESG disclosure among investors and also the often inconsistent and incomplete discourse due to the voluntary nature of corporate sustainability reporting.
  • Finally in 2021, input was sought by the SEC on whether current disclosures adequately inform investors. This was made at the same time the federal Financial Stability Oversight Council (FSOC) listed climate change as an emerging threat to the financial stability of the US.

[4] https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf

[5] https://www.reit.com/what-reit#:~:text=REITs%2C%20or%20real%20estate%20investment,number%20of%20benefits%20to%20investors

[6] https://carbonaccountingfinancials.com/

[7] https://www.ukgbc.org/wp-content/uploads/2019/07/Scope-3-guide-for-commercial-real-estate.pdf

CSRD: Is your organisation ready for the new ESG reporting requirements in Europe?

/in , /by

Further signs this week that the EU is seeking to strengthen environmental and social reporting requirements; Tuesday saw MEPs and EU national governments strike a provisional deal which would require major corporates to report on how their businesses impact on both people and the environment.

The Corporate Sustainability Reporting Directive (CSRD) will require that major businesses – defined as organisations with over 250 employees and a €40 million turnover – report their social and environmental impact against common standards. Tuesday’s move is an amendment to 2014’s Non-Financial Reporting Directive (NFRD) which set out its aim to encourage: “investors, civil society organisations, consumers, policymakers and other stakeholders to evaluate the non-financial performance of large companies and encourages these companies to develop a responsible approach to business”. The CSRD, if it can find agreement in the European Council and Parliament, will bolster the need for reporting on key social and environmental activities. These include requirements for:

  • The audit (assurance) of reported information
  • Detailed reporting requirements, and a requirement to report according to mandatory EU sustainability reporting standards
  • Digital ‘tagging’ the reported information, so it is machine readable and feeds into the European single access point envisaged in the capital markets union action plan.

In his overview of the drivers behind the CSRD, Pascal Durand, who led negotiations was clear:

“The European extra-financial audit market will be standardised, much more rigorous and transparent. Parliament succeeded in securing an opening of the audit market by member states in order to make room for new certified players to become major players and not just leave it in the hands of the financial auditors, notably the big four”.

The agreement, which if enacted will apply equally to public and private companies meeting the Accounting Directive size threshold, will be required to report on environmental, human rights, social standards and work ethics issues. Likewise, major non-EU businesses will be subject to the same provisions. In a nod to the difficulties comprehensive reporting can represent to smaller businesses, the agreement lays out a provision to less rigorous reporting for qualifying SME businesses and subcontractors.

The drive towards common standards is a welcome one, although details on those standards is not yet available. However, this year’s launch of the Social Taxonomy consultation gives an early indicator of the EU’s planned direction.  

If you would like to discuss the above with our ESG experts, you can get in touch with them today.

What is EVORA Global doing as a business to tackle climate change?

/in /by

Climate change is becoming an extremely popular combination of words; we can hear people talking more and getting interested in the topic, newspapers and tv releasing more information and adverts, and new sustainable start-ups rising in every sector.

Globally, we have seen an increased number of climate change manifestations and activist groups, and interactions around the keyword ‘sustainability’ grew 45.8% on Facebook and 30% on Instagram [1], proving that people are looking to connect with each over and with experts to become more knowledgeable about the topic and to act together.

In the last year, there has been a switch in many investors’ mindsets who are finally seeing climate change as the number one sustainability priority according to a poll of asset owners from more than 32 countries which came together for the Top1000funds.com online Sustainability event in March. 79% of investors said that climate is their number one ESG priority and this number is due to increase; more green funds will be provided to businesses who want to start or implement their sustainability journey.

This year, EVORA conducted an Investor Survey and one of the key findings is that a growing number of investors believe ESG will become common practice in 2022.  50% of respondents plan to include an ESG representative in their investment committee in the coming year. They said that integration of ESG in investment decision-making will mature in 2022 and more ESG focus is expected in the following investment lifecycle areas: investment mandates, deal sourcing, research and strategy, sustainable property management, internal training and governance. More than 75% of investors reported no link between ESG objectives and their remuneration, but 27% expect this to change in the coming years.

EVORA Global prides itself on being a sustainability consultancy and software business where our experts help clients by supporting them step by step during their ESG journey.

But what are we actually doing as a business to tackle climate change?

Let’s start from the beginning!

Back in 2011, Chris, Paul and Ed, EVORA Executive Directors and Co-Founders, had a big dream: to accelerate the evolution of real asset sustainability to enhance the wellbeing of the planet and its people. They thought hard about how to start helping businesses become sustainable. What could they do to gain trust? Where should they start from?

This is how our services were born. All of them are designed to bring sustainability to the forefront of real asset investment. Without even mentioning the benefits for our planet and its people!

Sustainability is still a developing journey with new and exciting innovations and opportunities for many people to make an impact; our services and support will certainly continue to evolve with it.

Recently, we have expanded into infrastructure sustainability, in addition to real estate, recognising that infrastructure assets can generate significant environmental and social impacts. Furthermore, this year we have introduced the Green Finance service as we recognised that the green finance agenda has been moved forward at a significant rate by the effects of climate change.

I am very proud to say that EVORA Global has signed up to several initiatives to advance the ESG agenda. They are a symbol of our hard work and our continued commitment towards sustainability.

The Planet Mark Business Certification is a recognised symbol of sustainability progress forcontinuous improvements; it encourages action and builds an empowered community of like-minded individuals. This is EVORA’s seventh year of business carbon footprint reporting and certification to Planet Mark. It demonstrates our achievement in reducing our carbon emissions associated with business operations by a minimum of 2.5% every year and our commitment to a continuous improvement in sustainability. Here’s to another seven years of great achievements!

In June 2020, EVORA joined nearly 100 other organisations in signing The World Green Building Council’s Advancing Net-Zero commitment. The commitment challenges businesses, organisations, cities, states and regions to reach net zero carbon in operation for all assets under their direct control by 2030, and to advocate for all buildings to be net zero carbon in operation by 2050. We are extremely proud of this commitment.

In December 2020, EVORA became a signatory to the United Nations Principles of Responsible Investment (UNPRI) underlining our commitment to advancing real asset sustainability. The UNPRI works to understand the investment implications of ESG factors and to support its international network of investor signatories in incorporating these factors into their investment and ownership decisions. In line with our company vision, we are committed to the Principles of Responsible Investment, and we actively support and endorse PRI among our clients.

The Sustainable Development Goals (SDGs) have been adopted by the UN General Assembly to guide global action towards a more sustainable future. Given that the real estate industry is responsible for almost half of energy and process-related emissions, we have a pivotal role to play in contributing to the achievement of these goals. We identified a number of SDGs that we can dedicate our expertise, ideas, and creativity towards achieving. We then divided them into two categories: ‘external’ SDGs that are relevant to EVORA’s service lines and ‘internal’ SDGs where EVORA can have the greatest impact through our people. Incorporating these goals into our work will strengthen our commitment and vision to accelerating the evolution and adoption of real estate sustainability to enhance the well-being of the planet and its people.

EVORA has at its heart the health and wellbeing of the team and I take this opportunity to unveil that we will soon move to a new office, how exciting! We have chosen a space that has better lighting and is visually more appealing to work in; the shape of the office space will allow a better desks configuration which will improve the social element. The building has been B EPC rated showing a very good property’s energy efficiency and fresh air is pumped in the office. 20% of the oxygen we breathe in is used by our brain to function and the amount of oxygen we have in our blood controls the release of serotonin which is the key hormone that stabilizes our mood, feelings of well-being, and happiness. Last but not least, the original building hasn’t been demolished but recently refurbished which means that less material has been used and less embodied carbon produced if compared to a new building.

At EVORA it is important for us to advance the ESG narrative around the globe. Because of this, last year we introduced the EVOLVE ESG Training Academy. These free webinars are accessible to professionals working in the real asset sector but also to whoever is curious to know more about sustainability. Yes, I have said FREE! The reason is simple, we want to make real assets more sustainable and to drive awareness of the changes needed to be made today, before it’s too late. The training webinars have reached 28 countries and more than 1300 individuals. Thanks to the support of everyone who has participated, we are motivated to keep the academy running for many years to come.

Nelson Mandela once said “Education is the most powerful weapon which you can use to change the world” and I wholeheartedly agree. Education is how people gain knowledge, critical thinking and skills to find solutions and create innovations to make this world a better place.

EVORA will continue to tackle climate change as a business, continue to expand our services and evolve our training programme; we will keep creating and promoting healthy and productive workspaces, and improving our business to retain all our ESG credentials.

I am really proud to be part of EVORA and I am delighted to work with like-minded people in such a respectful and transparent environment. There is an incredible bunch of people at EVORA who all really care – for one another, for the work they do, for their clients and for our planet.

[1] https://www.thedrum.com/industryinsights/2021/11/03/leading-sustainability

COP26: A Summary

/in /by

What is a COP?

A Conference of the Parties (COP) is an annual meeting of the signatories to a UN convention – an agreement to co-operate to tackle a global challenge. In the case of climate change, there are almost 200 states who have signed the UN Framework Convention on Climate Change (UNFCCC) since its creation at the Earth Summit in Rio in 1992.

At each COP meeting the details of how to co-operate, who will act and to what end is refined. In between each annual meeting there are a series of preparatory meetings of government officials and elected representatives. The progress in those intermediate talks can provide an indication of the political significance of each COP and its perceived success.

The first agreement to act was the Kyoto Protocol signed in 1997, and this was superseded by the now famous Paris Agreement in 2015.

This global political platform follows the success of the Vienna Convention and subsequent  Montreal Protocol, signed from 1987, to reduce the production and use of ozone depleting substances which created a whole in the Ozone layer. Amended in Kigali in 2016 to tackle F-gases, which also have a significant contribution to global heating.

Other related UN conventions, which have had less success to date, include the Convention on Biological Diversity. Whose COP15 took place online in October and will continue in Kunming in 2022.

Everything you need to know about COP26

We must prepare for at least 2°C of global heating. That’s the implicit outcome of COP26. The decisions which have been agreed upon by global leaders don’t meet the aspirations of the Paris Agreement to limit the average global temperature increase to well below 2°C; ideally to 1.5°C. This inevitably means that more lives will be lost and more economic damage will be done as a result of man-made climate change.

There is an obvious gap between meaningful action and all of the Net Zero announcements and the political fanfare about climate action. A report published during COP26 by Climate Action Tracker shows that we have a 66% probability of exceeding 2°C of global heating. It highlights the ‘credibility gap’ between all of this talk, and the intended action. That’s based on their review of the Nationally Determined Contributions (NDCs) – essentially each nation’s plan to reduce their Greenhouse Gas (GHG) emissions.

It assumes that these NDCs are fully implemented. We know that the best laid plans of Governments are never fully implemented, for instance the UK’s Building Regulations to limit energy consumption and GHG emissions are not enforced. Every new building emits more in operation than the design intent.

The Climate Action Tracker report is reinforced by analysis from CarbonBrief of three similar studies, which have reached a similar conclusion about the present best-case scenario being >2°C.[1]

When we talk of adapting to 2°C of global heating, it might not seem like much of a change. In the UK, it can lead to talk of a Mediterranean climate and an increasing number of vineyards. The truth is that this average temperature increase will be unevenly distributed and it will affect us all. We will experience more frequent and more extreme weather events. Those peoples closer to the equator and in the Global South will be disproportionately affected. The locations which are more climate resilient will become much clearer over the coming years, which will be reflected in their desirability and value.

We need to think about how this could affect our buildings and infrastructure. How well protected are they from flood risks, heat stress, wildfires and storms, and who bears the costs when damage is done?

The next two COPs, in 2022 and 2023, will be in locations which are closer to the equator and with a significant exposure to a changing coastline and increasing desertification – these are COP27 in Sharm El-Sheikh in Egypt and then COP28 in the United Arab Emirates.  It is likely that the immediate effects of climate change will be closer at hand and more visible than in Glasgow.

The State of Climate in Africa Report states that ‘by 2030, it is estimated that up to 118 million extremely poor people will be exposed to drought, floods and extreme heat in Africa”. In Madagascar, according to the World Food Programme, more than 1 million people are suffering right now from the first famine caused by climate change.

However, the 5-year cycle of submitting NDCs means that we could be five COPs away, in 2027, from the national action we need. That’s in the context of the need to halve emissions by 2030 and then halve them again by 2040. We’re running out of time and that is why we need to adapt.

Next year we will see the scientists of the Intergovernmental Panel on Climate Change (IPCC) publish their sixth assessment report (AR6). It is expected to forewarn us that the time left to take climate action is reducing and could be as little as four years. The AR6 Working Group I presented to COP26 and stated that ‘climate and weather extremes and their adverse impacts on people and nature will continue to increase with every additional increment of rising temperatures’. We know that there has already been lobbying by governments to weaken the text of AR6 which describes the latest climate change science.[2]

It is not surprising that this slow action and blocking of progress is causing ‘climate anxiety’ amongst young people, mentioned by Barack Obama in his COP26 speech. Greta Thunberg summed up her frustrations on Twitter, “Unless we achieve immediate, drastic, unprecedented, annual emission cuts at the source then at means we’re failing when it comes to the climate crisis.”

When a credibility gap exists between political announcements and concrete actions on climate change, particularly when it is seen as unjust and deadly, we can expect more peaceful protests and civil unrest. Obama has recommended Kim Stanley Robinson’s novel The Ministry of the Future. This describes a bleak future where a new global Ministry is created to protect the rights of future life on Earth after a catastrophic heatwave in India. It is a well-informed novel about climate change, but it does take these protests to the extremes of terrorist activity which is not an outcome any of us wish to see.

There were many global leaders at COP26, including President Biden, Bill Gates and Greta Thunberg, however there was also notable exceptions like President Xi Jinping. A mixed message from China when there is a concerted effort from the country’s leadership to act on climate change. There are signs of collaboration between the USA and China, including a joint statement and close negotiations in the final hours of COP26 between John Kerry, a hero of the Paris and Kigali negotiations, and Xie Zhenhua, China’s Climate Envoy. Xie has described climate change as an “existential crisis”.

Reasons for hope

There are reasons for hope from COP26. It is clear that there was a lot of energy at COP26, in the Blue and Green zones as well as on the fringes. More public and private sector commitments have been made than ever before. For example, India committed to a target of Net Zero emissions by 2070. Over $130tn AUM are now Net Zero aligned via the Glasgow Financial Alliance for Net Zero (GFANZ). Over half of the FTSE100 companies, with a market cap of over £1.2tn, have committed to be Net Zero Carbon by 2050.

The Chancellor, Rishi Sunak, announced that the UK will become the ‘world’s first net zero aligned financial centre’ with plans to publish a Net Zero Transition Pathway next year. This was supported by FCA announcements on a new ESG Strategy and a Disclosures & Labels Advisory Group for sustainable investments to support the development of the Sustainable Disclosure Regulation (SDR).

As regions and countries publish regulations to increase transparency of climate risks across all asset classes, the long-expected announcement by the IFRS Foundation that the International Sustainability Standards Board (ISSB) had been formed, was welcomed. This is an important step in standardising company reporting as it joins together the Value Reporting Foundation and Climate Disclosure Standards Board (CSDB), and builds on the Taskforce on Climate-related Financial Disclosures (TCFD) Recommendations.

For the UK, a Net Zero Whole Life Carbon Roadmap to 2050 was published by UKGBC.

Whilst there is obviously a concerted effort to mobilise private climate finance, there is still a shortfall in the $100bn (0.001% of global GDP) by 2020 commitment of finance for developing countries to enact necessary climate mitigation measures. At the same time, there continues to be $500bn of government subsidies for fossil fuels and the same amount to farming practices that damage our planet and our health.

Some small concessions were made at COP26 to increase this funding, such as the Breakthrough Agenda, MOBILIST, the Clean Green Initiative and the Climate Investment Funds’ Capital Markets Mechanism, specifically for clean technology including renewables and electric vehicles. The Urban Climate Action Programme will support cities in Africa, Asia and Latin America to transition to Net Zero by 2050. An Adaptation Fund and the Climate Action for a Resilient Asia (CARA) programme will support measures to improve climate resilience in Asia-Pacific cities.

For the UNFCCC process, the technology mechanism is led by the Technology Executive Committee (TEC) and the Climate Technology Centre and Network (CTCN). It can provide a focus for incubation and acceleration of relevant cleantech.

Over the last year, we have seen a number of initiatives to phase out coal power, including significant private divestment and China, Japan, Korea and the G20 commitments to end overseas funding of coal. At COP26, 190 countries and organisations agreed to end all investment in coal power generation. For major economies, this will be in the 2030s and in the 2040s for the rest of the world.[3]

Momentum is also building for the phase of the internal combustion engine, with a COP26 declaration to work towards 100% zero emission vehicles sales globally by 2040. This includes commitments from Ford, GM, Mercedes-Benz and Volvo, but not Toyota, VW and Nissan-Renault.

The USA, EU and UK also endorsed five principles for infrastructure development:[4]

  1. Infrastructure should be climate resilient and developed through a climate lens.
  2. Strong and inclusive partnerships between host countries, developed country support, and the private sector are critical to developing sustainable infrastructure
  3. Infrastructure should be financed, constructed, developed, operated, and maintained in accordance with high standards.
  4. A new paradigm of climate finance—spanning both public and private sources—is required to mobilize the trillions needed to meet net-zero by 2050 and keep 1.5 degrees within reach.
  5. Climate-smart infrastructure development should play an important role in boosting economic recovery and sustainable job creation.

These principles may be seen in practice in the Build Back Better World, Global Gateway and Clean Green initiatives.

Nature-based Solutions to climate change were also a big theme at COP26. This follows a clearer scientific understanding of the need to tackle both climate change and biodiversity loss at the same time, as well as growing interest in the Taskforce for Nature-related Financial Disclosure (TNFD).

The Glasgow Leaders’ Declaration on Forests and Land Use saw over 100 leaders, accounting for 86% of the world’s forests, commit to halting and reversing forest loss and land degradation by 2030. This was reinforced by an increase in the number of NDCs which include measures to reduce nature loss.[5] However, more is required for agriculture, which occupies half of the habitable land on Earth, and is still missing from many NDCs, with significant uncertainty about the related national emissions.[6]

Glasgow Climate Pact

Despite Alok Sharma’s best efforts, this compromised Pact will be seen as a political failure by many parties who do not have a vested interest in the fossil fuel-driven status quo. It is the first time a COP decision has recognised that there is an end for fossil fuels. Stopping the use of coal is considered a necessity to achieve 1.5°C – 8,500 coal plants would have to be closed by 2030 according to the IEA – and this part of the Pact was weakened.

The late intervention by India to change the wording of the agreement to ‘phasing down of unabated coal power and inefficient fossil fuel subsidies’ rather than ‘phasing out’ would not have been possible without the support of China and, in turn, the USA. It is a clear demonstration of how these politics work at the end of a very long extra day, and it provides a short extension in the support for fossil fuel power.

There has been progress since Paris. We have seen agreement of the ‘Paris Rulebook’, which is an important step in the implementation of the Paris Agreement, and this will ensure we see a ratcheting up of action.

In terms of the hope for achieving a temperature increase of well below 2°C, with a continued aspiration for 1.5°C, the Pact (article 29) does introduce a new annual ratchet mechanism – to revisit the NDCs in 2022 rather than in five years. There is a hope that they can be improved and it raises the stakes for COP27 in Egypt next year. The AR6 Working Group II will present to COP27 on adaptation.

The parties also recognise the concept of developed countries making payments to developing countries for ‘loss and damages’ for historic emissions which are causing damage now. This will be an ongoing dialogue and a reminder of the meetings which take place between each COP. There is a UN Subsidiary Body for Implementation (SBI) and it is focused on the implementation of the Paris Agreement and this Glasgow Climate Pact. SBI meetings 56-60 will take place between 2022-2024. Technical assistance will be provided via the Santiago Network.

If you want to see how fast we can progress politically keep an eye on the SBI and the other intervening UNFCCC meeting over the coming year. For future COPs we can expect the increasingly diverse involvement of women leaders, young people, indigenous people and local communities.

The collective efforts to tackle climate change, and the related challenge of biological diversity, will only ratchet-up over the next five years as we see increasing losses and damages from insufficient action. Decisions about what, how and when to invest and finance assets will have to consider this complex, dynamic landscape with a need to balance both climate adaptation as well as mitigation.

[1] https://www.carbonbrief.org/analysis-do-cop26-promises-keep-global-warming-below-2c

[2] https://www.bbc.co.uk/news/science-environment-58982445

[3] https://www.gov.uk/government/news/end-of-coal-in-sight-as-uk-secures-ambitious-commitments-at-cop26-summit

[4] https://www.gov.uk/government/news/us-president-biden-european-commission-president-von-der-leyen-and-pm-boris-johnson-announce-commitment-to-addressing-climate-crisis-through-infras

[5] https://wwf.panda.org/wwf_news/?4248391/NDCsreport

[6] https://ccafs.cgiar.org/resources/tools/agriculture-in-the-ndcs-data-maps-2021

Improving SECR Reporting

/in , /by

Unprecedented inflows into sustainable investment funds, the looming threat of climate change, and societal pressure for businesses to better align their activities to public interests are all driving an agenda towards better disclosure of non-financial information.

Ultimately, the “alphabet soup” of ESG reporting acronyms and frameworks exists today because different people want different things from ESG reporting and that leads to a lot of confusion. 

What about SECR specifically?

The Streamlined Energy and Carbon Reporting (‘SECR’) rules set out certain required statutory disclosures about emissions and energy use. From 1 April 2019, the rules expanded the existing emissions disclosure requirements for quoted companies and required emissions reporting for the first time for large unquoted companies and limited liability partnerships (‘LLPs’).

The Financial Reporting Council (FRC) have released a Thematic Review on Streamlined Energy and Carbon Reporting this month considering how a sample of companies have complied with the new SECR requirements, highlighting where they saw examples of emerging good practice, and setting out expectations for reporting in future periods.

Whilst the FRC saw many examples of good disclosure in their sample review, they noted scope for improvement across many of the reports.

What does this mean for my company? 

Below, we highlight some of the key takeaways that companies should be looking to incorporate in their SECR reporting process:

  • Present all the required information in a format which is clear, understandable, and easy for users to navigate.
  • Provide an adequate explanation of the methodologies used to calculate emissions and energy use and also the scope of the disclosure.
  • Describe the extent of any due diligence or assurance over emissions and energy use metrics, including explain the level of assurance given and scope of coverage. Avoid implying a higher level of assurance than has been given, for instance by using terms such as ‘audited’ or ‘verified’ inappropriately.
  • Provide an adequate description of energy efficiency initiatives in the current and comparative period.
  • Consider whether disclosure of additional information, such as scope 3 emissions, would be helpful to investors or other users.
  • Provide clear explanations which help users to understand and compare major commitments, such as ‘net zero emissions’ targets or ‘Paris-aligned’ strategies.

How we can help 

The SECR was intended to not be overly cumbersome, however specialist advice can navigate your compliance effortlessly. Starting with your business fundamentals, your assets, your people and your culture, the team at EVORA helps to work through the strategic decisions needed to deliver a business-oriented ESG strategy, and to service all your reporting, investment, data and communications needs. Email contactus@evoraglobal.com to speak to a member of our team.

Anticipating Actions and Metrics for the EU Social Impact Investment Taxonomy

/in , /by

In partnership with the University of Leeds, EVORA have been conducting extensive research into how social impact can be measured, in anticipation of the EU Social Impact Investment Taxonomy due for release in September 2021.

The increased profile of the ‘S’ in ‘ESG’ is driving demand for a standardised and established set of key performance indicators (KPIs) and metrics, against which funds can evaluate the progress and success of their social impact policies.

The ‘S’ of ESG

Social sustainability is commonly thought of as an ambiguous topic. This has led to a considerable gap in understanding how social impact can be integrated into ESG strategy with the same clarity as its environmental and governance counterparts.

As a result of limited resources, such as a clear framework and material metrics, social impact in ESG programmes is often overlooked. The result of this, is limited engagement from organisations in how they plan for, deliver, measure and report social impact.

Since the implementation of the Public Services (Social Value) Act, 2012 in the UK, private-sector uptake of social sustainability in the built environment has been both rapid and largely voluntarily. The Act only required that local authorities consider social value in procurement. Simultaneously, UK real estate managers became leaders in the implementation and measurement of social impact programmes.

In September 2021, the EU Commission plans to publish their Social Impact Investment Taxonomy. It is fair to anticipate that uptake in social impact programmes will mirror that of the UK in 2012.

Europe, therefore, face a challenge due to a lack of practical European-focussed guidance on social sustainability.

EU Social Impact Taxonomy

The Social Impact Investment Taxonomy will provide an opportunity for European investment organisations to develop a commercial response to current socio-economic risks. By clearly considering their social impact, funds can build their sustainability profiles and attract potential further investment.

Social Impact Metrics

The EU Social Taxonomy does not currently provide a clear framework and metrics for implementing and measuring social impact. Therefore, in anticipation of the increased interest in social impact and the built environment across Europe, EVORA have worked with the University of Leeds to research how learnings from tried-and-tested social impact programmes and metrics in the UK can be applied in Europe. These may facilitate discussions within your ESG team on how to practically address interventions and reporting in areas such as:

  • Training and Education
  • Charitable Support
  • Health and Wellbeing
  • Community Safety and Security
  • Community Space
  • Tenant satisfaction
  • Sustainable Transport
  • Social Enterprise Partnering
  • Health and Wellbeing aspects such as indoor air quality

The most important aspect of these metrics is that they go beyond the use of quantifying inputs and aim to recognise people as the end users of social impact programmes themselves.

EVORA is grateful to Gemma Graham for her dedication to, and assistance with, this research.

ESG Data is Growing Up

/in , /by
We are entering a new era of ESG data. Historic market failures regarding our negative environmental and social impacts, and the resulting climate change, nature loss and social inequality, are starting to be corrected with structural changes to the market.

In the financial sector, we are seeing both dynamic and double materiality becoming an integral part of decision making. The WEF introduced the concept of dynamic materiality in 2020, where an ESG topic which is financial immaterial today can become material tomorrow. That is coupled with double materiality, which considers both the inside-out view of ESG, that is what impact does an asset have on the environment and society, as well as the outside-in view of what impact environmental, social and governance issues have on the asset.

Climate change and carbon pricing is a good example. In terms of dynamic materiality, an increasing number of companies are adopting an evolutionary internal carbon price to drive low carbon investment in real assets and to mitigate the risks of cost increases as climate change externalities are corrected in the economy – this price will increase over time making financial materiality more likely across all sectors. There is an obvious point of connection here with double materiality, which is that real assets create emissions and will inevitably face more regulations over time – see the PRI Inevitable Policy Response Forecast Report. As our climate changes we will see an increase in severity and/or frequency of extreme weather events which can damage and disrupt real assets. All of these aspects of potential materiality have to be considered in financial appraisals and investment-grade ESG data can provide insight on trends and relative performance of assets.

Investment and Asset Managers are using ESG data from assets to make investment decisions: choosing the right assets to acquire and dispose of; deciding how to finance improvements to those assets; and investment & credit risk management processes are now incorporating ESG data. 

Those processes and decisions are becoming more transparent to the providers of capital, so the quality of ESG data has to become investment grade.

The expectations from investors, and their asset managers, of ESG data is closing the gap with the financial and commercial data captured in asset management software, but the budgets invested in ESG data management software and processes is vastly different. ESG data is now more valuable than it has ever been before and financial regulations are going to increase that value. 

The EU Action Plan for Sustainable Finance, and similar changes to UK financial regulations, means that the duties of asset managers & lenders and the decision they take about ESG risks and opportunities are no longer optional.

Without investment-grade data about ESG performance and sustainability actions then it is not possible to understand the full impact on asset value. ESG risk, in particular climate risk, is a financial risk and this data should be incorporated into every financial decision. 

That wasn’t the case last year, so this change is happening quickly. 

ESG data was being used in-house to monitor performance, as it has been for the last decade or so. It was used for annual reporting and for voluntary disclosure. There was a small minority of investors asking about ESG at the start of 2020, but throughout the pandemic this has changed quickly. Last year, there was not a fiduciary duty to be discharged based on ESG data. Nor staff incentive programmes based on ESG measurements. That has all changed as the market has grown up to take a more sophisticated view of how our economy relies on natural and social capital, not just financial and manufactured capital. The materiality of ESG has been recognised across the financial sector.

The financial markets are undergoing a structural change. Sustainable finance, and particularly climate-related finance, is now a global priority. This has led to changing investor requirements and regulatory changes for banks, institutions and fund managers, such as SFDR, MiFID ii and mandatory TCFD reporting are all combining to bring about structural change. We now have to consider dynamic and double materiality and make financial decisions accordingly.

It is slowly, but surely cascading down to real assets: real estate, infrastructure and land.

For those experts in sustainable real estate and infrastructure, it is clear that assets are likely to be mispriced and that the transparency provided by these regulatory requirements for ESG data will make that clear. Without ESG data on performance and actions, it is not possible to assess the cost of transition. For real assets, there is not a trading solution to disperse all of these liabilities by disposing of them to others. There is a need to retain, rethink, invest and dispose based on early knowledge of ESG risks. The later this happens the most likely it is that asset owners will see value erosion through reduced income, defaults, decreasing exit values and cap rate compression.

ESG transparency will also influence tenants and the users of real assets. There is a reputational risk of not taking sustainability performance seriously enough. Now that people have more choice about where they work and live, this risk could be more material to income and asset value than ever before.

At EVORA Global, with our SIERA and SIERA+ software, we are making these risks more visible and manageable. This is enabling our clients to make proactive decisions about their assets and funds, and to effectively engage with investors and other stakeholders.

It is time to approach ESG data in a new way. The historic policies, processes and procedures may no longer be fit for purpose. Most of them are only backwards-looking and there is now mandatory requirements to be forward-looking, which has its risks and uncertainties. In choosing an ESG data management platform ensure that it is future-proof, aware of this rapidly changing financial landscape.

If you would like to get in touch with the EVORA team, you can do so by filling in our form or by emailing contactus@evoraglobal.com

The case for ESG in Real Estate Debt

/in /by

Over the preceding decades, ESG has morphed from a niche add-on to a core part of any sensible investing strategy. Indeed, Standard Chartered estimates that $1 in every $4 is now invested in ESG. As ESG increasingly factors into investment decisions across the market, the case for real estate debt to consider ESG risk grows.

And it is easy to see why. ESG risks consistently feature in the World Economic Forum’s annual Global Risk Reports. For 2021, climate action failure and human-led environmental damage were among both the highest likelihood and highest impact risks of the next decade.

It is widely accepted that the next 10 years are crucial for tackling the climate crisis. Despite a temporary drop in GHG emissions resulting from the coronavirus pandemic, overall trends are that they continue to rise. With the race to net zero carbon one of the major global challenges facing the built environment, and one which is being targeted by corporates and governments alike, paying attention to ESG issues in real estate investing strategies has never been so critical.

The possibility of being left with stranded assets due to investment strategies being out of sync with emissions trajectories is fast becoming a reality. As we see regulations tighten, for example, minimum energy efficiency criteria for buildings, the reality is that these types of risks must be taken into consideration. Securing financing against an asset that could be unlettable in just a few years is not an attractive offer. As such, across the commercial real estate financial market, there is increasing pressure to disclose and mitigate ESG risk. And this extends to real estate debt.

Globally, green bonds and loans along with other types of sustainable debt rose to $465 billion in 2019 – an increase of 78% from 2018 (data compiled by BloombergNEF). These figures demonstrate that ESG is fast becoming a material consideration in debt financing. At EVORA we see this trend continuing, with the pandemic only heightening tenant and consumer expectations that the spaces they occupy positively impact on social and environmental considerations.

Sustainable real estate debt financing has grown rapidly over the last decade as alternative lending is increasingly sought. We see the momentum in this space continuing, and as the opportunities in this area continue to grow, early and effective ESG integration will be key.

EVORA works with clients helping them to develop ESG strategies and green debt frameworks, if you would like to discuss this you can contact us at contactus@evoraglobal.com

EVORA Global leads HECF to winning coveted ESG award

/in /by

EVORA is delighted to have supported our long-standing client Hines European Core Fund (HECF) in helping them win the 2021 PREA Real Estate Investment Management ESG award, beating 59 other Funds to the prestigious title.

The awards recognise PREA members at the forefront of environmental, social, and governance (ESG) issues within real estate investing and provides the industry with examples of best practices.

EVORA works closely with HECF to define and develop their sustainability vision across a diverse range of buildings throughout Europe. With a current AUM of over €2 billion spanning 30 assets, HECF has investments in 15 cities across nine countries.

Testament to EVORA’s depth of knowledge and experience in ESG strategy development, complemented by HECF’s commitment to sustainable investing, the Fund was able to commit to the following ongoing actions.

  • Utility data collection program in order to understand, monitor and optimise building operations.
  • Maintain 100% green building certification coverage (many of which are BREEAM In Use assessments conducted by EVORA).
  • 100% landlord-procured renewable electricity (backed by guarantees of origin)
  • Science-based target to reduce greenhouse gas emissions by 42% by 2025, and 60% by 2030 across the portfolio, against a 2018 baseline.
  • Net Zero by 2030 for landlord-controlled emissions.
  • On-site renewable solar thermal panels providing hot water at two assets – Caleido in Stuttgart and Via Crespi in Milan.
  • Numerous tenant and community engagement programmes and initiatives.

“Yet another one for HECF’s trophy cabinet! And once again we are proud and grateful to have played a key role in both strategy and delivery. Particular thanks on the EVORA side go to programme lead and Managing Consultant Sarah Harvey who’s rock-solid project management and technical skills were both critical ingredients to this success. Also, thanks to our team of software developers – led by Sonny Masero and Nick Hogg – whose routine enhancements to SIERA keep extending our reach and impact”.

Oliver Pye, Director

Disentangling ‘Community Engagement’, ‘Social Value’ and ‘Impact Investing’

/in , /by

Community engagement in real estate is where landlords, property/building managers and occupiers seek to better engage with the local municipality, landlords, occupiers and general public. Community engagement can span a variety of topics from investments in public realm improvements to engaging with schools, prioritising local employment and suppliers, recruiting apprentices, charitable donations, and environment, social and governance (ESG) education programmes.

Since the adoption of the Social Value Act in 2012, ‘social value’ has also emerged as a well-used term within the industry. Based on principles that aim to improve health, wellbeing, quality of life and communities [1], social value is the expression of a positive social change in terms of money – pounds and pence. Assessing outcomes through a financial proxy is useful as it further legitimises initiatives in our capitalistic society and provides a relatable and comparable metric for business and policy makers.

So, how does community engagement dovetail with social value? In its simplest form, community engagement is a programme/activity aimed at generating positive social outcomes. Social value is the process for measuring its impact on society, where possible expressed in market prices.

Why bother with any of this?

From a landlord’s perspective, community engagement is a valuable exercise to undertake as it can increase the value of assets and make areas more safe, attractive and vibrant for communities and occupiers, as well as improve the visibility and understanding of ESG issues. This in turn helps to make communities and occupiers healthier, happier and more productive.

It is important to note that not all community engagement activities can be quantified in terms of market prices. For example, the £ payback of building knowledge of sustainability within communities cannot be as easily quantified as creating local jobs, or apprenticeships, or giving charitable donations, which can feed substantial sums of money back into the local economy. Efforts to quantify social value in terms of market prices should focus on those initiatives where it is feasible and where it can be done robustly.

However, community engagement is a small part of the wider social value agenda. An array of other topics should be considered including, but not limited to, energy and water efficiency, tenant engagement, placemaking, accessibility and occupier health and wellbeing. In respect of energy and water efficiency measures for instance, if you are implementing energy performance and water saving initiatives at an asset level you are effectively driving affordability for your tenants.

Social value and community engagement also tie into impact investing, which is “investing with the intention to generate positive, measurable social and environmental impact alongside a financial return” [2]. Where it generates social and environment impact, community engagement can be a key tool in impact investing. Social value can provide a useful means of measuring and evidencing ‘impact’, particularly where it is used to quantify the socioeconomic benefit of your investment activities.

EVORA is supporting our clients to develop and deliver community engagement, social value and impact investing programmes and training workshops both in the UK and Europe. If you are interested in finding out more, please contact our ESG consulting team today at contactus@evoraglobal.com.

[1] Baldwin, C. and King, R. 2018. Social Sustainability, Climate Resilience and Community-Based Urban Development. 1st ed. London: Routledge.

[2] https://www.impactinvest.org.uk/