Laurence Monnier Head of Quantitative Research – Real Assets

The green premium is an elusive concept. Laurence Monnier reviews the academic literature and crunches some numbers to try and quantify the extra pricing power afforded by more sustainable commercial properties.

2040

We have committed to reach net-zero emissions across our real assets platform

Institutional investors are increasingly focused on delivering a positive impact1 on society through their investment strategies. As of March 2021, asset managers representing $37 trillion of assets, or one third of global AUM, have committed to be carbon neutral by 2050 or before – many have interim targets before that date. In January, we committed to reach net-zero emissions’ across our real assets platform by 2040.2

The increased investor focus reflects a deepening concern of the climate urgency that pervades society3, particularly millennials. As younger generations gain in wealth and corporate influence, the ESG focus will likely intensify.

The evolution of ESG: More than just a risk mitigator

We assess the evolution of ESG across asset classes, as well as its role as a risk mitigator and opportunity spotter.

Regulatory pressure to measure and report the climate impact of investment portfolios is increasing too. Although carbon disclosure initiatives like the Task Force on Climate-related Financial Disclosures started as voluntary, the direction of travel is towards mandatory disclosure and reporting, as is the case for UK pension funds. This trend is part of the global momentum for stronger ESG disclosure, exemplified by the recent Sustainable Finance Disclosure Regulation in Europe.

Understanding climate impact is critical to valuing buildings

Reducing the carbon footprint of the built environment – both residential and commercial property as well as physical infrastructure4 - is at the core of the challenges to reach net zero.5 But how does it translate into asset value?

How to build back better, greener and faster: A 10-point plan for UK infrastructure

Boris Johnson has called for an ‘infrastructure revolution’ to help lift the UK economy out of its coronavirus-induced malaise.

A review of academic literature on green premia – i.e. the higher pricing power of more sustainable buildings – shows that it has existed in real estate for much longer than the relatively recent surge in ESG demand and commitments to net zero. Although the studies are not comparable in their scope or method, they all confirm the existence of a green premium, which varies from five to 30 per cent.

A European study conducted in 2013 provided more granular analysis and showed a 0.45 per cent improvement of value for every one per cent improvement in energy consumption.

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