The institutional real estate industry is in discussion with UK regulators to adopt tailored and fit-for-purpose ESG metrics and product labels for the country’s sustainability disclosure requirements (SDR) regime.

Eight organisations (see full list below) including the Association of Real Estate Funds (AREF), British Property Federation (BPF) and the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) have written to the UK’s Financial Conduct Authority (FCA) setting out proposals which they hope could eventually become international industry standards.

The FCA recently consulted the investment industry on the SDR – effectively the UK’s version of the EU’s Sustainable Finance Disclosure Regulation (SFDR) – and the labelling of sustainable investment products.

The consultation closed in January this year, but since then real estate organisations have been in dialogue with the FCA with a view to ensuring the SDR regime uses appropriate metrics for real estate, and the FCA has requested proposals.

The submission to the FCA also includes proposals that would allow SDR to dovetail with the EU’s SFDR disclosure regime while also creating a sustainable investment product labelling system.

The EU’s European Securities and Markets Authority (ESMA) recently stressed that SFDR’s disclosure requirements should not be used a product labels. It also clarified that real estate funds that seek to improve the energy efficiency of buildings would not meet Article 9 requirements, despite their potential to make positive environmental impact.

Melville Rodrigues

Melville Rodrigues: “The submission represents an innovative consensus of – and collaboration between – key UK and European industry associations”

In its consultation paper published in November last year, the FCA proposed “mapping” sustainability labels to existing SFDR categorisation.

The submission to the FCA argues that the UK, through SDR, has an opportunity to create a “plain, concise and easily understood” product labelling system that “could be similar to the descriptions used in SFDR”, to assist UK firms already working to report under SFDR.

It proposes four labels – “not currently sustainable”, “sustainable transitioning”, “sustainable aligned” and “sustainable impact” – which would address the potential issues that real estate fund managers face with SFDR (see table below).

“The Associations consider that the use of such labels alongside disclosure criteria will assist with transparency and help comparison between different products,” the submission says.

“Additionally, this will enable the recognition of the different attributes of assets, including the real estate asset class, and is particularly relevant for retail investors, at different stages of their life cycles. This will be useful, for example, for funds with stranded assets but which are transitioning to ‘green’ and encourage such transition strategies.”

The proposals are also addressed to the Taskforce on Climate-related Financial Disclosures (TCFD) and the International Sustainability Standards Board (ISSB) and are intended to be aligned with TCFD guidelines and supplement the UN Principles for Responsible Investment (PRI).

Helen Newman

Helen Newman: “The group has consulted widely to ensure the reporting principles capture… the range of challenges within the real estate sector”

Melville Rodrigues, head of real estate advisory at Apex, said: “As a result of the FCA taking a leadership role in ESG regulation that is linked to TCFD principles, if done right, the UK SDR ESG real estate metrics may become the standard that is preferred by the market, even above the EU SFDR, and that is adopted within UK and internationally.”

Rodrigues, who has led the dialogue with the FCA and coordinated a working group behind the submission, said: “The constructive engagement between the FCA and industry will hopefully result in ESG real estate metrics in the UK SDR that the market finds workable and that add valuable transparency for investors and regulators.”

He said the proposals provided a solution to “the product label gap” experienced with SFDR, while also being applicable to other asset classes as well as real estate and to both institutional and retail investors.

Rodrigues said: “The submission represents an innovative consensus of – and collaboration between – key UK and European industry associations on proposals for ESG real estate metrics and product labels.”

Lonneke Löwik, CEO of INREV, said: “It’s critical that the real estate investment industry ends up with workable sustainability metrics, which provide investors with relevant, useful information and meaningful product labels.

“With this in mind, we’re delighted to be collaborating with our industry partners to contribute input that we hope will help lead to better regulations in this area.”

Helen Newman, head of sustainable finance at CBRE Capital Advisors and a member of the working group, said there was an opportunity “to encourage an alternative approach” which takes “lessons from the SFDR, which is a disclosure regime, and not a basis for classification for product labels”.

She said: “We propose the FCA adopts plain, concise and easily understood product labelling statements, but which could be similar to the descriptions used in SFDR so as to assist UK firms who have established or are establishing processes to report under SFDR.

“We have advocated that the FCA does not require considerations on how products that are already classified under the EU regime could map across to the UK classification system. Pursuant to this we have outlined some potential product labels we feel are appropriate to real estate.”

How product-label proposals line up against SFDR categorisation

 SFDR Working group proposals 
Article 6 Not currently sustainable (FCA has proposed labelling these “not promoted as sustainable”)
Article 8 Sustainable transitioning
Article 9 Sustainable aligned
  Sustainable impact

Newman said the submission was intended to “ensure the disclosure criteria respond better to real estate, as opposed to being primarily suited to equities”.

She said: “The group has consulted widely to ensure the reporting principles capture and articulate to the FCA the range of challenges within the real estate sector.”

Newman said the “ability to capture and report accurate asset-level data is significantly influenced” by the different types of property, the level of development – from new construction to retrofits – and whether it involves debt or equity.

“While we have suggested indicative reporting metrics, we highlight that this is not an exhaustive list. We hope to work with the FCA in the development and refinement of sector-specific real estate metrics alongside a broad group of industry representatives going forward.”

Lora Brill, head of ESG at Orchard Street Investment Management and member of the ESG committee of the Investment Property Forum (IPF), said: “Engaging with and responding to policy makers and other industry bodies on the development and promotion of ESG issues as they pertain to real estate investment is a key priority of the IPF’s ESG committee.

“As a member of the IPF’s ESG committee, this has been an important collaboration to further policy-makers’ cognisance of the potential impacts on real estate investment of ESG-focused regulation and legislation.”

Oliver Light, real estate commercial director at Carbon Intelligence and member of AREF’s ESG and impact-investing committee, said: “Disclosure regimes like SDR work most effectively when the metrics and targets they require investors to report on are clear and tailored for specific asset classes.

“One of our key aims in this submission to the FCA is to provide that commercial real estate lens to the draft SDR and help establish metrics that are appropriate, deliverable on the ground, and use real data rather than estimates and models.

“Getting the metrics right will drive ESG performance and transparency across commercial real estate. Investors will be able to understand the ESG and climate-change response at the portfolio or asset level, and for the wider market it provides confidence that the sector is protecting biodiversity, limiting the impact of climate change and considering physical and transitional risk.

“Having real data rather than estimates and models means we can go beyond disclosure and start to affect performance in the real world.”

Rodrigues said the FCA had welcomed the collaboration, adding: “hopefully, it will implement key messages”.

These include, he added, that ESG metrics for real estate for SDR and TCFD disclosure and compliance should be freely available for all industry stakeholders to enable consistency of disclosure.

He said ESG might need to adapt and change over time and regulators should recognise this.

“As policy – alongside technological advances and industry ambitions for ESG performance – evolve, ESG metrics for real estate will need to be updated, and accordingly the FCA regulations from time to time revised to reflect the updates.”

To view the full submission, click here.

The eight associations that have signed the submission

Association of Real Estate Funds (AREF)

British Property Federation (BPF)

Commercial Real Estate Finance Council Europe ( CREFC Europe)

European Association for Investors in Non-Listed Real Estate (INREV)

Investment Property Forum (IPF)

Pensions for Purpose (PfP)

Social Market Foundation (SMF)

The Good Economy (TGE)