Global ESG (Environmental, Social, Governance) ratings and index provider MSCI has announced a partnership with Carbon Risk Real Estate Monitor (CRREM) to improve its work on decarbonisation pathways and greenhouse gas analysis for real estate.
The MSCI (LON:MSCI) ESG ratings work is important as real estate owners and managers struggle to meet the demands of the net zero transition. While energy efficiency is now expected in new builds, there are significant volumes of old stock which needs to be addressed.
New home development is a large contributor to global emissions
The built environment contributes almost 40% of global emissions – with operational emissions (energy used to heat, cool and light buildings) accounting for 28% of the total and embodied emissions (materials and construction processes during the entire building lifecycle) generating a further 11%.
That means addressing real estate emissions is going to play a fundamental role in meeting economy-wide net zero targets, and therefore an increasing target for policy makers.
It’s worth pointing out that during the lifetime of a building, there is every likelihood that owners and managers are going to affected not only by physical climate risk but by an increasingly demanding policy environment.
At the same time, according to research from the largest commercial real estate services & investment company CBRE, the gap between the greenium and brownium for buildings is increasing. For example, in the US, office rents for LEED-certified office buildings are 5.6% higher than those for non-certified office buildings.
Growing concern from investors has seen the European Association for Investors in Non-Listed Real Estate Vehicles develop sustainability guidelines for investors, while real estate has been included in the Global ESG Benchmark for Green Assets (GRESB) for a couple of years.
ESG moving into more investment strategies
In fact, 60% of respondents to CBRE’s 2021 Global Investor Intentions Survey stated that they have already adopted ESG criteria as part of their investment strategies, with the Americas, EMEA and Asia-Pacific all recording a stronger focus on ESG issues than in previous years.
What the new partnership sees is the integration of new emissions intensity and decarbonisation pathways data into MSCI’s Climate Value-at-Risk (VaR) model, which should help investors better understand both transition risk and the ways in which it will evolve.
MSCI Climate VaR model
The partnership will see two CRREM decarbonisation pathways being embedded into the established MSCI Climate VaR model, increasing the number of transition risk pathways available for MSCI’s real estate users from 15 to 17. More importantly, it provides increased granularity on proxies for emissions intensity – incredibly important when the actual data is unavailable.
What will the MSCI Real Estate Climate VaR Model try to achieve?
The aim of the MSCI Real Estate Climate VaR is to provide a forward-looking and return-based valuation assessment to measure climate-related risks for real estate assets in an investment portfolio.
Oliver Marchand, global head of ESG and climate research & development, MSCI, said that “investors are increasingly seeking to quantify and analyse climate risk exposures to enable them to make informed decisions about asset allocations and take steps to meaningfully tackle climate change.
Integrating data and methodology from CRREM further expands the information available to real estate investors using Climate VaR, so they can set climate goals, report on progress, measure risk over the long term and push towards net zero.
Real estate and ESG investing
Of course, real estate is not only affected by climate risk and its associated emissions profile.
It is an asset area of particular interest to ESG investors precisely because buildings and developments can have significant impacts on the social framework and physical environment of communities.
Even around existing building stock, there is potential upside through the rehabilitation of public spaces, and interest in social housing, green buildings and more.
Investors are becoming conscious of the potential impact of ESG factors on return, and they are increasingly concerned about the lack of available data to help them assess their exposure, as well as their opportunities.
Given that the environmental element of ESG is the highest priority today, because of the impact of energy use and embodied emissions, less attention is being paid to the S and the G.
Yet this partnership could provide a useful tool for understanding portfolio-wide exposure in markets where direct data is hard to access and provide a stepping stone towards a more holistic approach.