At a practical level, this involves establishing certain roles in an appropriate organizational model and embedding ESG considerations in pre-identified key business processes. INREV also stresses the importance of an effective and regular monitoring system throughout the vehicle’s life cycle, i.e., setting up a proper due diligence system to identify new investment opportunities and monitor ongoing investments.
Furthermore, a set of Sustainability Reporting Guidelines (Module 2.1) and recommendations is presented as part of the INREV Reporting module. These reporting Guidelines, applicable for periods beginning on or after 1 January 2024, have been published not only with the objective of meeting investors’ increasing expectations in relation to ESG, but also to take into consideration the current pace of regulatory and business initiatives, such as the EU Sustainable Finance Action Plan.
The Sustainability Reporting Guidelines (Module 2.1) link the long-term ESG strategy of the vehicle to annual objectives and annual portfolio information – e.g., it requires a defined action plan including quantifiable annual targets, which are then reported against. The recently released 2023 version introduces a more comprehensive scope of KPIs: 109 in total (73 environmental, 36 social). There are two categories of KPIs which cover:
1) Required KPIs: data and disclosures of core KPIs covering key attributes such as energy consumption, greenhouse gas emissions, and other environmental measures. These include Principle Adverse Impact indicators derived from the Sustainable Finance Disclosure Regulation (SFDR).
2) Recommended KPIs: to be disclosed based on investment managers’ capabilities and investor needs.
To draft such non-financial reporting requirements and best align with the ESG market, INREV took inspiration from several existing regulatory requirements, such as SFDR, and from voluntary non-financial frameworks/standards including but not limited to the Global Reporting Initiative (GRI), the UN Principle Responsible Investment (UN PRI), the Task Force on Climate-related Disclosures (TCFD) and the Global Real Estate Sustainability Benchmark (GRESB).
What operational challenges can be expected?
Similarly to the implementation of any financial guideline, the implementation of the INREV Sustainability Guidelines brings with it some operational challenges.
Real estate investment vehicles operate in an environment where tasks and roles, namely strategic decision making and daily operations, are assigned to several different parties, which can include external service providers (e.g., external fund managers).
However, most of the fundamental ESG-related policies and procedures tend to operate within the investment manager’s organization. It has been observed in the industry that this situation typically results in complex and diverse governance models, which rely on an effective definition and allocation of roles and responsibilities among the actors involved. While INREV Sustainability Guidelines do not mandate any specific activity to be undertaken by an exact function, the investment manager, with the support of the governing body of the real estate vehicle, should ensure collectively that the governance structure is appropriate to effectively govern the vehicle, from an ESG perspective as well, in accordance with the best interest of its investors and other stakeholders.
INREV Sustainability Guidelines require that the structure of the governance framework, and how roles and responsibilities within it are allocated and applied to the vehicle concerned, are explained to its investors.
Moreover, the real estate investment vehicle needs to develop an annual reporting system to collect and integrate financial and non-financial information to meet the annual reporting requirements set up by the organization.
INREV regularly reviews and monitors ESG requirements to ensure consistency with the latest standards of the market. The latest review and consequent update of the 10 attention areas previously mentioned within this article took place in the first half of 2023. We are now already assisting our clients to review their INREV-specific disclosures and related processes both on the financial and ESG fronts.
In addition to what we have been saying so far, based on our experience with our clients, we would like to highlight that the main challenges remain:
The perception that the full implementation of certain ESG requirements may be in contrast with certain strategic requirements of the investment vehicle;
The impression that significant resources, which may be lacking in the market or may be expensive, are needed, including human resources, technical expertise, data and tools;
The gap between ESG targets and delivery of the investment vehicle’s ESG performance could exist in some circumstances.
It is commonly recognized in the market that the ability to integrate a response to sustainability factors into business operations models can be a success factor for a real estate investment vehicle. Therefore, we are developing a “sustainability journey” with our clients, which combines financial and non-financial processes, reporting requirements, and operational challenges, to provide assurance over the disclosed information. To be compliant with the latest INREV ESG reporting, indeed, it is necessary to report in line with the new requirements.
However, solid methodologies, robust governance systems and underlying processes must also be in place to ensure the integration of sustainability risks and to capture new opportunities from ESG.
