2023 Sustainability Outlook Report
The Urban Land Institute (ULI) released the 2023 Sustainable Outlook Report to analyze the ESG situation faced by the global real estate industry. Founded in 1936, ULI currently includes more than 45000 real estate and urban development companies in 80 countries. Its report has a wide impact on the real estate industry, construction industry and financial industry.
The 2023 Sustainable Development Report will focus on the topic of sustainable building environment. The increase of global energy costs puts forward higher requirements for industry efficiency. At the same time, the regulatory policies of national regulators on ESG also require that companies need to provide more detailed sustainable information and pay attention to the impact of development on the environment and society. According to the views of the members of the ULI Council of Asia-Pacific, Europe, and the Americas, ULI has prepared this report on sustainable development.
Key Points of the Sustainability Outlook Report
In 2022, the world is in “climate chaos”, and the risks of climate change to the real estate and construction industries are increasing. At the same time, the transformation risk of low-carbon economy also poses risks to the industry. The real estate and construction industries are capital-intensive, which makes them highly dependent on financing, investment, valuation, and other financial activities.
With the opinions of experts, ULI summarized this report into five parts, namely:
- Adjusting ESG strategy for macroeconomic complications;
- Embedding transition risk in transactions and valuations;
- Harnessing the power of collaboration;
- Addressing global flood challenges;
- Responding to government influence;
From the perspective of ESG, the first two items mentioned in the report, ” Adjusting ESG strategy for macroeconomic complications” and ” Embedding transition risk in transactions and valuations “, are important measures for the industry on sustainable development.
Adjusting ESG Strategy for Macroeconomic Complications
In 2022, the rise of energy price increases the operating cost of enterprises. At the same time, countries have raised interest rates and tightened monetary policies, so that the financing costs of enterprises continue to rise. In next year, how to balance the relationship between profitability and sustainable development is an important issue for the real estate and construction industries. Taking the European 2030 climate action target as an example, about US $3.7 trillion will need to be invested in building renovation in the next few years, but the report believes that only 1% of building renovation is implemented at present. This means that the current ESG practice in the industry is still relatively slow.
The carbon emissions of real estate assets account for 39% of the global total emissions, so the sustainable development of the real estate industry is very important for global carbon reduction. However, in the face of macroeconomic uncertainty, increasing sustainable investment may affect the financial stability of enterprises. In addition, the gradual attention of investors to ESG makes some enterprises with backward sustainable development unable to attract the attention of the market under the screening strategy of “negative elimination”, which constitutes a negative cycle for their operation and carbon reduction actions.
Embedding Transition Risk in Transactions and Valuations
Transition risk refers to the business risks that enterprises may face, such as regulatory risk, technical risk, resource risk, reputation risk, etc., as the global economy turns to low-carbon and climate-friendly. At present, the progress of global climate disclosure regulations is fast. The global TCFD framework requires enterprises to disclose the emissions of Scope 1 and Scope2, and Scope 3 disclosure will be added soon. The valuation of asset transactions after decarbonization has also become a challenge for the industry.
ULI believes that valuation of real estate should include “carbon value”, that is considering the subsequent carbon reduction costs in the future. These costs can be reflected in the negative cash flow and discounted to the current asset value. This approach can consider the transition risk in the real estate pricing. However, the determination of carbon value and whether the buyer and seller can reach an agreement on the valuation methods are not known.