Sustainability

January 2025 Forecast

The cost of climate risk

Investors will have to publicly disclose and implement their climate transition plans aimed at retrofitting assets to align with the Net Zero Carbon Pathway, as mandated by European legislation. Additionally, investors must address the financial implications associated with the adaptation to prospective climate-related risks.

Mid-year review

• Retrofitting existing buildings remains the most frequent choice of action as the improvement of buildings to meet sustainability standards offers a good opportunity for enhancing returns. Most investors already have the funding for sustainability initiatives available, suggesting that this is often an integral part of the business plan when allocating or raising capital.
• Commercial property owners and investors are increasingly experiencing a heightened risk premium on properties susceptible to climate-related events, irrespective of individual property exposure.

January 2025 Forecast

Evolution of financing strategies

Lending institutions are expected to implement incentives and strategies aimed at financing retrofitting. There will be considerable variation in local market practices, depending on the maturity of the market and the robustness of financial institutions. Conversely, in line with their aim of reducing the carbon footprint of financed portfolios, financial institutions will be selective in approving refinancing for assets requiring upgrades.

Mid-year review

• Many financial institutions and several national banks now use the EU taxonomy (EUT) as the benchmark for green loans and investments. Assessment of full and partial alignment with the current, and, when applicable, revised taxonomy, helps real estate assets and funds drive more sustainable investments in a low carbon economy, even on a voluntary basis.
• According to our 2025 European Lender Intentions Survey, sustainability is increasingly emerging as a pivotal consideration in financing decisions. Nearly half of the surveyed lenders stated that they are implementing minimum asset-level criteria related to sustainability as a prerequisite for new lending activities or require business plans for assets failing to meet these criteria.

January 2025 Forecast

Navigating the complex reporting landscape

The EU’s Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CS3D), will require companies in scope to publicly disclose their climate transition plans and implement them to the best of their ability. This reinforces the need for corporates to have a robust transition plan to achieve climate goals.

Mid-year review

• In a move designed to reduce administrative burden on companies, the European Commission proposed a Sustainability Omnibus package. The revised European Sustainability Reporting Standards (ESRS) are set to substantially reduce the number of required metrics and qualitative disclosures..

• The interplay between the Omnibus package and political decision-making in the U.S. creates a climate of uncertainty that hampers the execution of sustainability strategies. The pullback by the U.S. from climate initiatives present opportunities, with European markets potentially attracting more capital from sustainability-conscious investors.

Figure 14: In what ways do sustainability criteria influence lending on real estate?

Figure 15: How much of a margin decrease are lenders willing to offer for assets that meet certain sustainability criteria?