What RICS' Updated Global Sustainability Standard Really Means For Property Values

The Royal Institute of Chartered Surveyors got the industry talking in January when it published its updated global standard on environmental, social and governance and sustainability in commercial property valuation. 

“This is a big step,” said Antonio Marotta, head of growth and performance-sustainability at advisory firm Catalyst. “Sustainability performance can now formally influence asset value where it is significant, measurable and evidenced in the market at the valuation date, which demands an even greater need for better-quality data.”

RICS’ updated standard comes into force on 30 April. As well as laying out a framework for how ESG factors should be reflected in valuation, it details the different roles of advisers and valuers. 

Bisnow spoke to Marotta about how the updated standard will affect property values and what the industry can do to prepare. 

Bisnow: What does the RICS update mean for the commercial real estate industry?

Marotta: ESG considerations are now embedded in valuation practices. The scope of work of valuers and the exercises they go through need to go beyond what they have been doing up until now and consider ESG factors to the extent they are significant to value, documenting relevant evidence. 

The update details how the work of valuers differs from the work of sustainability consultants and advisers. Advisers look at future scenarios and forecast what is likely to happen. In contrast, the standard calls for valuers to quantify the impact of ESG risks posed by the asset as it is right now. 

Bisnow: Is the industry welcoming this new formal approach? 

Marotta: Institutional asset managers certainly do because it drives consistency. Across the industry, it better explains value drivers to lenders and investors. By making a stronger link between building performance and financial outcomes, it exposes underperforming assets.

It also increases demand for strategic advice to translate sustainability risks into something that can be quantified. 

Bisnow: How have views shifted from considering sustainability as an area to report on to something that impacts asset value?

Marotta: This is an enormous shift. In some cases, reporting had become entirely compliance-driven, focusing on nice-to-have improvements that affect building performance. Data was often disconnected from investment decisions. 

The focus now is on having material information that directly affects value, including income, liquidity, capital expenditure risks, business plans and cash flows. 

There is a growing recognition of green premiums — better financial terms for high-performing assets — and brown discounts — a reduced market value for real estate that performs badly. For example, if an asset cannot be rented from 2027 because the energy performance certificate is too low according to the minimum energy efficiency standard valid in England and Wales, this directly impacts its cash flow and will impact value today. 

People are placing far more importance on data, both in terms of collection and the completeness of information. Data needs to be validated because valuers have a responsibility to ensure values are correct.  

Bisnow: How does sustainability performance impact factors such as lease structures, rental growth expectations and capex modelling?

Marotta: High-performing real estate improves the demand and attracts better tenants that are more reliable. This directly impacts the financial performance of an asset. 

Badly performing assets will not only lack rental resilience but will face retrofit costs and capex pressures that need to be accounted for in future cash flow. 

We are seeing more evidence of green leases being important on both sides. We worked with a landlord recently whose tenant had put a clause in the lease that made the landlord liable for energy costs if they exceeded a certain energy performance threshold. This pushed the property owner to retrofit the building as much as possible. 

In this case, the tenant had the power, but green leases are often geared towards asking the tenant to achieve a certain level of energy use. This area is going to grow as both sides ask to be collaborative. 

Bisnow: How is this shift evidenced in refinancing and financing conditions?

Marotta: We can see this clearly in our client base. We recently worked on a UK logistics development where the finance was linked to several ESG criteria, including alignment to the EU taxonomy for sustainability activities and BREEAM certification. If the asset met a certain requirement, it secured a 15-basis-point reduction on the loan interest rate. 

Generally, lenders are assessing ESG risks when considering whether to provide finance for an asset. Fifteen basis points might not sound like much but could mean the difference between a business plan working or not. Weak assets will face more scrutiny on future capex plans. 

This was the ultimate purpose of the Sustainable Finance Disclosure Regulation, which is mentioned in RICS’ standard. It can influence capital allocation towards funds and underlying assets that are more sustainable to ultimately help property owners and managers do the right thing.

Bisnow: How important are data and an evidence management system?

Marotta: The stronger the data and evidence, the stronger the final valuation. Property owners need to provide additional data and evidence to what has always been considered reliable, such as planning permission and construction documents.

Referring back to the green loan I mentioned, the lender required the developer to provide quarterly reports detailing progress against everything that was included in the requirements. 

We created our evidence management system, Obi, to collect and store all this data. The audit trail means that information can be easily accessed by anyone who needs to see it.

This sort of tool is becoming essential even from the due diligence phase. It details how evidence is structured, frequency of collection and what evidence there is to justify the data. This is all becoming a minimum requirement, and a red flag if it isn’t all there.

Bisnow: How will this standard change the industry? 

Marotta: ESG and sustainability will become even more integrated into asset management, rather than seen as a standalone exercise. There will be a bigger gap between future proof and obsolete assets as well as between a green premium and a brown discount. 

The market will focus on measurable performance as well as data quality. This will all be on platforms that bring in automation and AI. 

This article was produced in collaboration between Catalyst and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.