ESG

Question 1

What is the purpose of the RICS ESG professional standard?

Answer 1

It provides a practical framework for incorporating sustainability and ESG factors into commercial property valuation and strategic advice, ensuring valuations are evidence-based and aligned with market practice and global standards.

Question 2

What does ESG stand for in property valuation?

Answer 2

Environmental – energy use, carbon emissions, climate risk
Social – wellbeing, accessibility, occupier demand
Governance – regulations, compliance, reporting

Question 3

Why is ESG important in valuation?

Answer 3

Because ESG factors can materially affect value, risk, liquidity, and income, and are increasingly influencing investment and lending decisions.

Question 4

Give examples of ESG factors affecting value.

Answer 4

Energy efficiency (EPC ratings)
Climate risks (flooding, overheating)
Regulatory compliance (MEES)
Capex requirements for retrofit
Occupier demand for sustainable buildings

Question 5

Valuation vs Strategic Advice
❓What is the difference between valuation and ESG strategic advice?

Answer 5

Valuation: Reflects ESG factors as evidenced by the market
Strategic advice: Forward-looking, may include recommendations, scenarios, or risk mitigation strategies

These are separate services and must not be confused.

Question 6

How should ESG-related costs be treated in valuation?

Answer 6

Consider capital expenditure (capex) and operational expenditure (opex) where relevant

Only include where market participants would reflect them

Recognise limits—valuers are not cost consultants

Question 7

What is “stranded asset risk”?

Answer 7

The risk that a property becomes obsolete or non-compliant (e.g. due to poor energy performance), leading to reduced value or liquidity.

Question 8

What are “physical” and “transition” climate risks?

Answer 8

Physical risks: Flooding, extreme weather, overheating
Transition risks: Regulatory changes, carbon pricing, retrofit costs

Question 9

What is the “green premium” and “brown discount”?

Answer 9

Green premium: Higher value for sustainable assets
Brown discount: Value reduction for inefficient/non-compliant buildings

Question 10

What challenge do valuers face with ESG?

Answer 10

A lack of consistent data and market evidence, creating a “valuation deadlock” where ESG risks are known but not always reflected in pricing.

Question 11

How does ESG align with the RICS Red Book?

Answer 11

The Red Book requires valuers to consider sustainability where material, and the ESG standard provides guidance on how to apply this in practice.

Question 12

How can ESG influence investment strategy?

Answer 12

Asset selection (focus on sustainable buildings)

Risk management (avoid stranded assets)

Value enhancement (retrofit and repositioning)

Question 13

What professional competencies are required for ESG valuation?

Answer 13

Understanding of sustainability risks

Ability to interpret ESG data

Awareness of regulation (e.g. MEES)

Knowing when to seek specialist advice

Question 14

Why is there a “valuation deadlock” in ESG?

Answer 14

The “valuation deadlock” refers to the situation where valuers rely on market evidence to reflect ESG factors, but the market itself is slow to price these risks due to inconsistent data and lack of transparency.

As a result, valuers may be aware of risks such as poor EPC ratings or climate exposure, but cannot fully reflect them in value without transactional or rental evidence.

This creates a feedback loop:

Investors wait for valuers to reflect ESG risk
Valuers wait for market evidence

To address this, valuers should:

Clearly report ESG risks and uncertainties
Reflect impacts where evidence exists
Avoid speculation but ensure transparency in reporting

Over time, as regulation (e.g. MEES) and data improve, this deadlock is likely to reduce.

Question 15

❓ Do you think ESG is fully reflected in current market pricing?

Answer 15

No, ESG is not yet fully reflected in market pricing, although its influence is increasing.

There is growing evidence of:

Brown discounts for non-compliant or inefficient assets
Green premiums for highly sustainable buildings

However, pricing remains inconsistent across sectors and locations, largely due to:

Limited comparable evidence
Varying investor priorities
Data gaps in ESG performance

In my opinion, the market is currently in a transitional phase, where ESG is increasingly considered but not yet systematically priced.

Valuers must therefore:

Reflect ESG where evidenced
Provide narrative commentary where it is not yet priced

Question 16

Can valuers include future ESG improvements in a valuation?

Answer 16

Generally, valuers should reflect current market value based on the asset’s existing condition, not speculative future improvements.

However, future ESG improvements may be considered only where they are reflected in market participant behaviour, such as:

A purchaser pricing in committed capex
Evidence of transactions reflecting reversionary potential

If the improvements are:

Uncertain or not yet committed, they should not be included in market value
Instead, they can be addressed through separate strategic advice or scenario analysis

It is essential to clearly distinguish between:

Market value (evidence-based)
Investment or asset management advice (forward-looking)

Question 17

How do you deal with a lack of ESG data in valuation?

Answer 17

Where ESG data is limited, I would take a structured and transparent approach:

Seek available data
EPC ratings, flood maps, energy performance benchmarks

Use proxies where appropriate
Age of building, specification, location-based risks

Apply professional judgement
Based on market norms and comparable assets

Clearly state assumptions and limitations

Highlight uncertainty in the valuation report

Importantly, I would not speculate beyond what is reasonable but ensure that material risks are still disclosed, even if not fully quantified.

Question 18

What is stranded asset risk and how would you reflect it?

Answer 18

Stranded asset risk refers to the potential for a property to become economically obsolete, typically due to:

Regulatory changes (e.g. minimum EPC standards)
High retrofit costs
Reduced occupier demand

In valuation, this may be reflected through:

Higher yields to reflect increased risk
Reduced rental assumptions due to weaker demand
Increased void periods
Consideration of capital expenditure requirements

However, adjustments must be supported by market evidence.

Where evidence is limited, I would ensure the risk is clearly reported, even if not fully priced into the valuation.

Question 19

How would you reflect climate risk in a valuation?

Answer 19

Climate risk can be split into:

Physical risks (e.g. flooding, overheating)
Transition risks (e.g. regulation, decarbonisation costs)

In valuation, I would:

Assess whether these risks are material to the asset
Review market evidence such as pricing, insurance costs, or investor behaviour

Where evidenced, impacts may be reflected through:

Yield adjustments (risk pricing)
Cash flow adjustments (e.g. higher costs, voids)

Where not yet evidenced, I would:

Include clear narrative disclosure
Highlight uncertainty and future risk