$120tn of assets, including commercial real estate (CRE), are now managed globally by financial firms signed up to the Task Force on Climate-related Financial Disclosures (TCFD). This initiative aims to standardise climate-change financial risk disclosures, helping to put environmental sustainability, one of the three pillars of environmental, societal and governance (ESG) investing, at the front of investment decision making.

While the TCFD is currently voluntary, Mark Carney, current Governor of the Bank of England (BofE) advised participants at the recent CFA ESG conference, to “expect that, or something like that to become mandatory within a couple of years”.*

The BofE is already incorporating climate change scenarios in its financial system stress tests, with entities such as insurers reporting the degree of losses to their assets, including CRE, under different warming scenarios.

Banks and insurers are increasingly recognising the financial risks of climate change, with a BofE survey finding that 75% of UK-operating banks judging it as a financial risk. This compares to only 10% of banks surveyed seeing it as more than a corporate, social responsibility (CSR) issue, just four years ago. This recognition of risk is driving demand for both green buildings as well as leading some (longer-term) investors to consider the future exposure of real estate assets to the effects of climate change in their decision-making.

These initiatives are just some of the reasons why 93% of respondents to a global real estate survey by the UN, Bentall Kennedy and REALPAC, said they are now including ESG criteria in their investment decision-making. As a real estate sector, we need to be prepared to manage this demand.

But ESG investing in commercial real estate is not just about managing financial and regulatory risk, investors are increasingly seeing ESG investing as a way to seek returns. For example, 80% of respondents in the above survey said they are using ESG criteria in their investment decisions, due to strong tenant demand for green buildings. With enhanced demand comes the potential for a rental premium. We explore this further in the articles linked at the bottom of this article.