Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
Risk Avoidance & Financial Opportunity
Global markets are at the start of a seismic shift in capital reallocation in favor of sustainable investing. It’s a trend demonstrated in research carried out by PwC, which estimates that ESG funds will increase from a 15% share of the European sector to 57% by 2025. This transition away from business-as-usual can, at least in part, be accounted for by three key factors:
1) A growing recognition that ESG funds have fewer risks and generate greater returns.
ESG scoring provides a granular view of assets and filters out investments that carry higher environmental, social, and governance risks. Investors are increasingly looking to mitigate their exposure to the physical risks associated with climate change in an effort to avoid real estate assets becoming stranded and asset value depreciation. These risks include flooding, overheating, water scarcity, storms, and cold snaps.
But the benefits of ESG extend beyond the confines of mere risk avoidance. It can also improve financial returns through greater operational efficiency, better stock price performance, and enhanced reputational and asset value.
2) Regulators and governments are expanding their focus on ESG reporting.
In the UK most businesses will be obligated to report on their physical and transitional climate-related risks using the Task Force on Climate-related Financial Disclosures (TCFDs) framework by 2025. This surge in data availability will enable investors to make more informed decisions about the investments they make. The Black Rock chair Larry Fink summarised this simply in an annual letter to CEOs: ‘climate risk is investment risk’.
If developers and asset managers are to align with investor priorities, there is an imperative for them to actively minimise the climate-related risks their assets are (and will be) exposed to. The reward for this recalibration will be renewed investor and lender confidence in the long-term viability of assets, higher asset valuations and preferential lending rates.
3) Financial decision-makers seek more sustainable solutions.
Increasing disclosure and public awareness of sustainability is impacting investor allocation and demands are being made of companies to act. BlackRock surveyed 425 investors in 27 countries representing $25 trillion assets under management, finding that 54% consider sustainable investing fundamental to investment process and outcomes.
Nature: The Multifunctional Solution to Physical Risk
Historically, climate-related risks have been mitigated through grey infrastructures such as sewers, floodwalls and HVAC systems. These are typically expensive, singular in function, and difficult to expand retroactively. However, the built environment industry is waking up to nature-based solutions as a multifunctional approach to climate adaptation whilst meeting wider ESG priorities. Along with many other benefits, they can reduce energy consumption, improve air quality, create social value and benefit mental and physical health. These functions are otherwise known as ecosystem services.
Nature-based solutions, as a concept, were introduced towards the end of the 2000s by the World Bank and IUCN, and are defined by the European Commission as:
“Solutions that are inspired and supported by nature, which are cost-effective, simultaneously provide social, economic and environmental benefits and help build resilience. Such solutions bring more and more diverse, nature and natural features and processes into cities, landscapes and seascapes, through locally adapted, resource-efficient and systemic interventions.”
Put more simply, they are structures like green walls, green roofs, parks, and Sustainable Urban Drainage Systems (SuDS) which have social, economic, and environmental benefits.
According to The Office for National Statistics, the financial value of ecosystem services in the UK is estimated at £958 billion. Defra also predicts the value to increase over time due to:
- demand for the benefits heightening
- the impacts of climate change intensifying
- the user base increasing through population growth
- nature becoming scarcer in abundance and distribution
Nature’s value can be added to or subtracted from by organizations, however, this interdependency is poorly understood. To better enable firms and financial institutions to understand their impacts on nature, a Task Force on Nature-related Financial Disclosures (TNFDs) has been established. Spurred by the success of the TCFDs, the framework will provide the tools to identify, assess and report risks associated with nature. We will wait to see the impacts this has on the financial community and if it gains the weighting of the TCFDs.
These nature-related risks can be overcome in the built environment by embedding nature-based solutions into real asset design. This can mean unlocking new revenue streams, delivering public environmental goods, increasing customer engagement, and lowering operational costs.
Quantifying Nature’s Benefit to Real Assets
Nature’s functional, economic and social value has been long under-recognized due to the challenges in quantifying its benefits, subsequently enabling traditional grey infrastructure to become the default for the industry. However, the EU’s Urban Innovation Actions (UIA) project IGNITION condensed the findings of more than 1,000 scientific papers to determine just this.
The research found that Sustainable Urban Drainage (SuDS), which is widely used to manage rainfall, can retain 60-73% of rainwater run-off, helping reduce flood risks. Perhaps a more compelling argument in favour of SuDS is the research carried out by Defra, which found they can reduce construction costs by up to 30% compared to traditional drainage systems.
Nature-based solutions can also provide a significant level of cooling both within and outside of buildings, for instance, street trees reduce air temperature by 3oC. These measures can help mitigate the Urban Heat Island and create temperatures comfortable to live and work in. Thermal regulation measures could help reduce the number of heat-related deaths, a figure which the IPCC estimates could reach 7,000 annually by 2050 as summer temperatures continue to rise.
The graphic below shows the headline findings of two of the five types of nature-based solutions reviewed in the IGNITION Projects research:
Enabling Nature-Based Solutions
The UKGBC has encapsulated an ambition for the industry that combines aspirations around climate-resilient assets and utilizing nature-based solutions through the following statement:
“By 2030, all buildings and infrastructure will, throughout their lifetime, be climate resilient and maximise environmental net gains, through the prioritisation of nature-based solutions”
In April this year, the UKGBC launched a set of six guiding principles to assist developers, owners, operators, and occupiers of buildings and infrastructure to work toward this target by integrating nature-based solutions into the design, construction, and operation of real assets. Each principle provides supporting methodology, bringing together a combination of industry best practices, resources, and initiatives.
Meanwhile, Government regulation will further stimulate the built environment industry to create more nature. The impending update to the Environment Bill will set out a legal requirement for new developments to achieve and retain a 10% biodiversity net gain for 30 years. This legal requirement can be met through the creation of multifunctional nature-based solutions, which will also deliver assets aligned with investors’ ESG priorities.
Creating Meaningful Change
The Government-imposed global lockdown measures driven by the COVID-19 pandemic put the spotlight on the social disparity in access to green space. Present and future homeowners, as well as organizations, are reassessing where they live and operate, considering the social aspects of buildings and the interactions people have with space.
Putting humanity on pause has demonstrated that when nature has the space it can regenerate. The reduced noise pollution allowed animals to better communicate in areas with busy anthropogenic soundscapes and were able to return to more effective hunting and mating behaviors. Globally, animals have been exploring our quieter urban areas; deer have been seen grazing at Washington homes near to the White House, peacocks have wandered the streets of Bangor in Wales, and wild boar strutted through the streets of Barcelona.
Healthy ecosystems can be created through the provision of interconnected spaces across urban landscapes: strategic landscaping can increase species’ resilience to factors like disease, climate change and invasive species. Natural habitats are commonly fragmented or poorly connected, typically resulting in small inbreeding populations that become increasingly vulnerable. Nature Recovery Networks are a concept developed by the Wildlife Trust that seeks to reconnect these isolated habitats through urban greening. The government is now piloting Local Nature Recovery Strategies to map areas where nature can be restored.
Nature’s value is amplified when it flourishes and, ultimately, strengthens our ability to depend on natural systems for food security, water management, air quality, and temperature regulation.
This article was written by Robert Winch, ESG Consultant, Hoare Lea.