Three real estate industry bodies have produced a set of proposals aimed at EU regulators to solve problems arising from the Sustainable Financial Disclosure Regulation (SFDR).

A working group comprised of Association of Real Estate Funds (AREF), European Association for Investors in Non-Listed Real Estate (INREV) and the Investment Property Forum (IPF) have published the SFDR Real Estate Solutions Paper, which aims to support SFDR’s goal of preventing ‘greenwashing’ while also avoiding some of its counter-productive effects.

Earlier this year, a report by INREV argued that SFDR, in its current guise, could have the unintended consequence of diverting capital away from real estate investments that make the most positive environmental impact and even encourage greenwashing.

The newly announced proposals come ahead of an anticipated review and industry consultation on current SFDR rules.

In a statement today, INREV, AREF and IPF said SFDR “should be supported in its ambition to accelerate decarbonisation of financial market activities, including the built environment, and to inhibit greenwashing”, but they also said a number of solutions were needed to solve “challenges” surrounding its application to real estate.

The paper proposes remedies for several challenges that involve:

  • Differences in the calculation methodologies between SFDR and recommendations of the Task Force on Climate Related Financial Disclosures (TCFD);
  • Inconsistencies with energy performance certificate (EPC) ratings among EEA member states;
  • Confusion surrounding what should be included under the mandatory principal adverse impact (PAI) “exposure to fossil fuels”;
  • Treatment of energy-inefficient assets under the PAI.

“The working group has provided a valuable service to the real estate industry in identifying potential solutions to the challenges presented by the SFDR and I have been pleased to be able to contribute,” said Abigail Dean, head of strategic insights at Nuveen, chair of the INREV ESG committee and Better Buildings Partnership (BBP) board member.

“I appreciate the leadership shown by AREF, INREV and IPF and the thoughtful approach that they have taken in exploring the issues and bringing in views from across the real estate investment sector. The EU Action Plan on Sustainable Finance and the SFDR are critical to encouraging the flow of capital into sustainable solutions and I hope that this consultation response and the recommendations within will help the regulation to better achieve that goal.”

Aleksandra Njagulj, managing director, global head of ESG real estate at DWS, vice-chair of the INREV ESG Committee and ULI Sustainability Product Council member, said the working group of “industry ESG specialists approached the task diligently and proactively, looking to illustrate the specificities of real estate investment management and the nexus with SFDR”.

She added: “The result is an extensive analysis of the questions posed alongside with potential solutions. We trust the feedback and suggestions will be well received and serve to improve the next iteration of regulation.”

Julie Townsend, vice-president and ESG lead for Europe and Asia-Pacific at PGIM Real Estate, ULI UK Sustainability Product Council member and co-chair of the BBP investor working group, said: “SFDR has had a huge impact on the commercial real estate sector. If we can get the instruments the regulation lends on correct, we can make the impact entirely positive.

“Additionally, if we can make the instruments it leans on translatable across the Americas and APAC, a business like PGIM Real Estate takes this positive impact beyond the EU and right across the globe.”

Melville Rodrigues, head of real estate advisory at Apex Group, AREF Public Policy Committee member and IPF member, said: “SFDR has laudable aims in laying down harmonised transparency rules and integrating ESG factors into investment decisions and financial advice. Constructive engagement between regulators and market stakeholders is key to achieving successful SFDR real estate regulation.

“Regulators and stakeholders have shared goals, like accelerating net-zero pathways and attracting capital for transition strategies. We hope our paper facilitates industry debate and regulator engagement, so SFDR works appropriately and efficiently for our real estate sector.”

Lonneke Löwik, CEO of INREV, said: ”INREV has worked hard to help regulators to understand the importance of disclosure requirements that supports allocation of capital to vitally needed real estate transition. The paper supports this important effort.”

To read the latest edition of the latest IPE Real Assets magazine click here.