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Blowing hot and cold: Tackling the ESG valuation conundrum
Over the past few years, tackling the climate crisis has become a significant priority for the nonlisted real estate industry, with an increasing number of investors, managers and tenants committing to more sustainable portfolios.
Spurred on, in part, by regulatory initiatives, environmental, social and governance (ESG) criteria have helped to drive forward the shift to green assets and presented new opportunities for those operating in the sector. However, although the shift to ESG decision making has been evolving for a number of years, the industry is just beginning to grapple with the thorny details, such as how to account for ESG in valuations.
As it stands, valuation methodologies generally reflect the current market value or, in other words, the estimated exchange price of a property in light of comparable evidence. It does not explicitly consider sustainability factors, such as those related to decarbonisation strategies.
Imagine two properties in the sa