Environmental considerations in underwriting

As part of Phase 2 in this initiative, INREV's paper ‘Integrating environmental considerations in real estate underwriting: Assessing impacts on value and returns’, explores whether specific environmental data inputs can be linked to financial outcomes using a standard discounted cash flow (DCF) methodology. 

Key findings include:

• Improvements in energy efficiency showed the clearest payback effects. Changes in asset value as a result of investment programmes reflected a combination of environmental assumptions and broader market dynamics, making it difficult to isolate value shifts to environmental interventions alone.
• Gaps in ESG data and limitations in assumptions around yield movements and Opex savings constrained the analysis. Separating environmental Capex proved challenging, as many upgrades serve multiple purposes.
• Five principles were identified: engaging valuers on key environmental factors, estimating sustainability-linked Capex and assessing payback, defining testing scenarios, prioritising interventions to mitigate ESG risks, and enhancing transparency of assumptions. This approach can give insights into likely impacts on asset strategies.
• More consistent definitions, better data collection and exchange, and greater transparency around assumptions can be promoted by strengthening collaboration between investors, managers, and valuers.