Environmental considerations in underwriting
Investors and managers across Europe are setting ambitious ESG strategies, however, they struggle to translate those strategies into tangible financial outcomes. INREV has assembled a dedicated ESG Valuations Focus Group to bridge this gap by helping the industry better understand how ESG goals impact underwriting inputs and expected returns.
INREV’s latest paper, 'Integrating environmental considerations in investment underwriting', raises awareness on how environmental factors are underwritten in investment decisions.
- Investors and investment managers are assessing environmental impacts to protect long-term value, but there is no consistent approach
- Six key factors, including energy efficiency, carbon intensity, and physical climate risk, are among the most quantifiable in underwriting
- Market practices like shadow carbon pricing and green IRR modelling reflect a growing focus on evaluating sustainability in real estate strategies
- Four scenarios are proposed, ranging from ‘No defined environmental goals’ to ‘Ambitious environmental goals’, to model how different levels of commitment impact future value and returns
- Data gaps and inconsistent measurement create challenges for integrating environmental factors into underwriting and valuation. Greater transparency and clearer disclosure can support more consistent incorporation into financial models.
ESG Valuations Focus Group
The group comprises senior experts from across the industry, such as investment managers, institutional investors, valuers, and representatives from the Big Four accounting firms.
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Constantin Sorlescu
Director of Professional Standards