UCL report - Property lenders feel pressure to meet ESG requirements

The report, ESG in the Property Finance Industry, highlights how property lenders are adopting ESG practices to improve their corporate citizenship, and explores the challenges they are facing amidst greenwashing fears and a complex and dynamic regulatory environment. This is the first report released from UCL’s new Centre for Sustainable Governance and Law, based in the Bartlett Faculty of the Built Environment, sponsored by Puma Property Finance.

Large organisations (such as banks and pension funds) have responded to the increased public focus on ESG by diverting funding to impact funds and increasing the granularity of their internal and external reporting. However, smaller organisations, such as property finance lenders, may struggle to shift their organisations to a new, lower-impact footing. These smaller organisations can lack the skills, knowledge, funding, and time to understand and adapt to the new operating and reporting environment. While there is strong demand both from the market and regulators for these lenders to adopt ESG practices, the absence of any global ESG standards, coupled with conflicting definitions and reporting requirements, is creating hesitancy and uncertainty in the market.

There is a huge amount of regulation for lenders to contend with – for example the EU’s Sustainability-related disclosure in the financial services sector (SFDR) requirement lays down direct mandatory reporting obligations that guide how financial product providers describe the sustainability attributes of their products. The existence of these regulations means that property financing companies will need to gather data from the building level in accordance with the regulatory requirements of the jurisdictional requirements of funding organisations, irrespective of where the building is.

There are also still concerns about greenwashing and data verification of ESG policies. In the UK, for example, the Financial Conduct Authority (FCA) is concerned that some loans and products that are badged as sustainable may not be delivering the intended outcomes. The FCA is looking to develop a code of practice in this area, and there is an increased focus on reducing greenwashing, or green hushing. Together, these regulatory policies impose a series of direct reporting obligations on larger, usually listed organisations. However, with the recent extension of the EU’s reporting requirements, these are expected to impact on medium and small sized property finance organisations shortly. 

Lead author, Dr Armando Castro (UCL Bartlett School of Sustainable Construction) said:

“Given the challenging regulatory and political backdrop, the pressure on companies to report and integrate ESG is growing and the reporting landscape is complex and dynamic. Property finance organisations that want to be ahead of the curve need to start developing, implementing and collecting meaningful, granular ESG data that might be used for potentially different reporting frameworks, investor requests, voluntary standards and future regulations.”

In developing the report, UCL interviewed a number of different funds (with over £1.5 trillion under management) and other industry participants to establish the extent of ESG adoption across the property finance sector. While some have adopted robust measures, with specific exclusions policies, KPIs, full transparency and independent validation, other firms have been early adopters of impending regulations. In comparison some property finance providers comply with regulations but beyond that do very little, describing their routine practice very carefully (for example, ‘we consider ESG issues in each investment decision’), paying lip service to the ESG agenda, effectively ‘green hushing’.

When it comes to ESG reporting, larger lenders/property finance organisations highlighted that they are providing highly granular data related to ESG performance. For example, international reporting is seeing a shift away from the use of abstract building sustainability ratings towards more specific and granular data points focusing on areas such as carbon in use while biodiversity and natural resources are fast rising up their funders’ agendas.

Given the anticipated trickle-down of regulations from funders who will be requesting increasingly granular and transparent information, the report highlights the key considerations for the property finance industry to develop and communicate their ESG position. For example, companies should decide where they want to stand on material ESG issues, they need to consider developing KPIs & transition pathways, plus how they integrate it into their reporting and remuneration strategies.

Dr Armando Castro said:

“During this review, we have observed a sense of inevitability in ESG reporting that will introduce significant direct or indirect reporting obligations on property finance organisations globally. Companies of all sizes need to decide how to respond to this change given it will not be a voluntary adoption issue for much longer. Senior leadership teams must now decide how ESG will be part of their organisation’s strategy going forwards and will need a clear plan to implement these changes.”

Paul Frost, managing director of Puma Property Finance, and sponsor of the report comments:

“The findings of UCL’s research highlight the need for the property finance community to come together to provide targeted, implementable solutions that support the next wave of sustainable development in the UK.  All of us in the industry are at different stages on this journey, but by sharing knowledge and ideas we can be most effective. 

This is debt’s time – in this higher interest rate environment, the cost of finance is having a real impact on property development.  Lenders have real influence now, and our industry can use it as a force for change.”

The new Centre for Sustainable Governance and Law sits within the UCL Bartlett School of Sustainable Construction: the first built environment faculty in the UK, and one of the global leaders in this field. Dr Armando Castro is the centre’s director and an Associate Professor at UCL, while co-author Dr Kell Jones is the deputy director. They have been researching and writing about ESG related themes for over 15 years. Other team members’ expertise spans economics, finance, civil engineering, surveying, geography, management and law, in order to tackle and solve the wide-ranging issues across the industry. Puma Property Finance contributed and provided support for this report and the centre.

Read the report 'ESG in the Real Estate Finance industry' here.