COPENHAGEN: Investors in European real estate face a heightened risk that their assets will become devalued unless they invest vast sums in green renovations, thanks to a new law passed in the bloc.
The legislation in question is the Energy Performance of Buildings Directive.
It’s likely to force banks and asset managers to allocate billions of euros toward renovating buildings, in order to meet new energy standards.
Failure to do so raises the prospect of being unable to sell or rent.
Property investors’ “primary concern is asset stranding,” said Jillian Giberson, a senior policy analyst at Longevity Partners, which provides climate risk assessments to the financial industry.
Depending on investment strategies and portfolios, “a lot of asset managers are going to find that their buildings may be stranded within a decade or so,” she said.
The European Parliament earlier this week passed a version of the directive that mandates a zero-emissions building stock by 2050.
The European Union (EU) estimates that buildings are the bloc’s biggest consumers of energy, with 85% of the total stock in the region built before 2000. As a result, the vast majority suffer from “poor energy performance,” the EU has found.
Neil Menzies, director of sustainability at Hibernia Real Estate Group Ltd, a Dublin-based firm owned by Brookfield Asset Management, said in February that he expects the value of unsustainable properties to “plummet over the next 12 months.”
Unn Hofstad, Nordic head of sustainability at the real estate unit of Norway-based Storebrand ASA, said renovations will be needed even in Scandinavia, where buildings regulations have tended to be tougher than elsewhere in Europe.
“The older part of the building stock still needs to be upgraded due to both climate risk aspects and tenant market preferences,” Hofstad said by email.
Emissions-free
The EU has set a 2033 deadline to renovate a quarter of the worst-performing properties across the bloc.
After 2030, all new buildings must be emissions-free, a metric that includes production and disposal of construction materials. Fossil fuel boilers will be banned by 2040.
The legislation comes as the commercial real estate (CRE) market takes a beating from higher interest rates.
Around 9% of big banks’ loan books are in CRE, and the loans are turning up on non-performing lists at a higher rate than average, according to the European Central Bank, which is closely watching the market.
What’s more, financial regulators are taking a closer look at how assets are valued.
The UK’s Financial Conduct Authority said this month it will review practices in light of the higher share of assets now being held privately, where valuation practices aren’t as transparent.
And investors are growing increasingly cautious.
“We’re seeing more and more loan terms, long-term loans particularly, linked to environment, social and governance (ESG) criteria,”said Milko Pavlov, a managing director in the valuation advisory unit of Houlihan Lokey.
That “requires a very quantitative assessment of the underlying exposure and its performance.”
The Securities and Exchange Commission (SEC) will force companies to disclose their greenhouse gas emissions for the first time, but watered down a key requirement after heavy lobbying from industry groups.
Defence stocks, long seen as too controversial for ESG investors to touch, are back in play against an increasingly tense geopolitical backdrop, according to an analysis by Citigroup Inc.
The analysis comes as Ursula von der Leyen makes defence a key plank of her manifesto for a second term as European Commission president, with analysts at Jefferies noting that “investors should monitor the degree to which spending on her defence agenda displaces financial support for the EU’s climate policies.”
European authorities have proposed shielding smaller companies from the bloc’s proposed due diligence requirements, in a bid to win over countries that have so far withheld their support.
Member state representatives are expected to reconvene on March 15 to discuss another compromise.
According to analysts at Jefferies, the fate of the Corporate Sustainability Due Diligence Directive is now “unclear.”
Facilitated emissions and banks that signed up to the world’s biggest climate finance coalition have agreed to apply emissions reduction goals to their capital markets businesses.
Among the many headaches UBS Group AG inherited when it swallowed its crosstown rival was one tied to Credit Suisse’s multibillion-dollar shipping portfolio.
This particular issue wasn’t about the quality of Credit Suisse’s loans, mind you. Instead, said two people familiar with the matter, it was how to account for their climate risk.
UBS Group AG is set to scrap a planned phaseout of coal financing that Credit Suisse had backed, as the global wealth manager prepares to unveil how the merged bank will tackle climate change.
Moving ahead
The UK said it plans to move ahead with regulating ESG ratings providers, according to its 2024 spring budget.
In the world’s second-biggest ESG debt market, corporate clients are starting to walk away.
Extra regulatory requirements, fewer financial incentives and the risk of being accused of greenwashing are putting off clients who just a few years ago were champing at the bit to attach an ESG label to their financing, according to bankers and lawyers close to the market.
Rachel Richardson, head of ESG at London-based law firm Macfarlanes, says this year might be “a bit of a crunch point for both borrowers and lenders” in the market for sustainability-linked loans.
There’s a growing sense of unease among asset managers that companies with conspicuously small tax bills pose a financial liability too big to ignore.
A majority of European Union countries are urging the bloc’s executive to speed up its review of agricultural policies and develop a concrete plan for measures to ease unrest among farmers across the region.Europe will be three degrees Celcius hotter even if the world succeeds in limiting global warming to 1.5 degrees Celsius above pre-industrial levels, bringing with it the heightened peril of extreme weather and trillions of euros of damages to the economy.
Insurers may be able to capture up to US$15bil in premiums by 2030 from climate-technology capital spending alone as they exit high-carbon sectors. It see’s new growth opportunities in greener assets both in insurance provision, and their inclusion in funds. — Bloomberg