Leading real estate industry bodies, the Association of Real Estate Funds (AREF), European Association for Investors in Non-Listed Real Estate (INREV), and the Investment Property Forum (IPF), have collaborated to address the challenges arising from the Sustainable Financial Disclosure Regulation (SFDR).
The coalition recently published its ‘SFDR Real Estate Solutions Paper’, presenting a series of problems and proposals aimed at overcoming obstacles posed by the SFDR within the real estate sector.
The working group acknowledges SFDRs ambition to help the decarbonisation of financial market activities, including the built environment, and to combat greenwashing. However, they believe solutions are needed to address challenges surrounding the regulation’s application to real estate.
Conflicting methodologies
One of the key challenges identified by the group is the differences in methodologies between the SFDR and the recommendations put forward by the Task Force on Climate-Related Financial Disclosures (TCFD). The group has stressed the need for clarity and alignment between these two frameworks to ensure consistency in reporting environmental impacts and avoid confusion among market participants.
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Inconsistent applications across regions
Another challenge raised involved reporting with inconsistent energy performance certificate (EPC) ratings among EU states. To tackle this issue, the real estate industry group is asking for guidance on how to apply the Energy-Efficient Building’s Principal Adverse Impacts (PAI) to different methodologies and EPC ratings within each member state. Additionally, they are looking for clarity on applying the PAI to countries outside the EU that lack EPC standards entirely and where nearly zero-emission building (NZEB) regulations are not in effect.
Fossil fuels
The group also highlights the confusion surrounding the mandatory PAI “exposure to fossil fuels.” The authors stress the importance of clarification around the fossil fuel supply chain. One example includes whether the storage of fossil fuels within a real estate asset, even without on-site usage, should trigger the PAI. This means figuring out how much a building is affected by fossil fuels – whether it should be based on the whole building or based on how much space it has or how much it costs.
Moreover, the definition of energy-inefficient assets is considered “overly complicated and unworkable” due to the separate methodology applied to buildings constructed after December 31, 2020. The real estate industry group has proposed streamlining the definition by adopting a single methodology applicable to all buildings, thereby ensuring greater clarity and consistency across the sector.
The next steps
The proposals come ahead of an expected review and industry consultation on the current SFDR rules, closing on 4 July 2023 and may lead to an update of the SFDR regime at the end of 2023/early 2024.
Abigail Dean, head of strategic insights at Nuveen Real Assets and chair of the INREV ESG committee, said: “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.”
