ESG/sustainability in UWs
Hello,
Eager to hear how you guys approach ESG-related things when underwriting deals. Currently it seems that everyone is talking about ESG and sustainability (at least here in the Northern Europe) affecting pretty much everything that is happening out in the market. So curious to hear the following:
i) How important are ESG factors in making new investments? Is it possible to invest in a property if one cannot achieve good enough EPC ratings (and what is good enough at your firm?) or if CRREM tool suggests a too early stranding for the asset?
ii) What tools you primarily use to assess properties' ESG features? What are the primary ones you consider? E.g., EPC ratings, CRREM tool, any others?
iii) How much have you seen brown discounts in the market due to assets not having good enough ESG profile?
iv) How you incorporate ESG factors in modelling/underwriting?
With regards to the iv) question, for example at my firm we penalise every asset at exit with a "carbon tax" if the carbon footprint cannot be reduced below the pre-determined threshold or if certain EPC rating is not achieved.
Curious to hear your thoughts in this field!
I live and work in the American Southeast. I'm going to be honest man - we don't think about it at all. There's a good chance if I brought it up in a meeting that I'd get made fun of for being "woke" by the good ol boys down here. At most, we've moved over the years from installing 2 EV chargers on site to 10+, but that's just because a lot more people drive EVs these days.
Now I will say I am trying to get my own thing off the ground that leans heavily into sustainability and is attempting to get to net zero construction, but that's more of a marketing tactic. We won't get any underwriting benefit from it outside of operational savings. We'll hopefully get the benefit when we land tenants who care about that emphasis.
I will piggyback off this and echo the same sentiment over here in the southwest. On the multi side, green incentives are good and all but only used if they help the bottom line. The only thing I have seen only the industrial side is debt providers wary of deals that have Oil/Gas tenants, but at the end of the day, if the leases are strong, they usually get through that fear when pushed.
I think if you're building to own, or building specifically to market to demographics that care about ESG and sustainability, it makes sense. I even personally believe in those kind of initiatives.
But for merchant built multifamily? No one is paying you for the extra effort. They're putting a cap rate on the NOI.
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