The EU鈥檚 Sustainable Finance Disclosure Regime (SFDR) could have the unintended consequence of diverting capital away from real estate investments that make the most positive environmental impact and even encourage 鈥榞reenwashing鈥�, according to a report published today.
Research by INREV suggests sustainable real estate funds are avoiding Article 9 categorisation 鈥� SFDR鈥檚 highest designation 鈥� so they do not fall foul of the rules, but risk missing out on capital that might otherwise allocate to them.
The real estate association argues that, because the SFDR framework was designed to capture a 鈥榮napshot鈥� of the sustainability of investments, in real estate it 鈥渦nintentionally signals investment towards new construction鈥� rather than existing assets where greater impact can be made.
The report, , also criticises the fact that embodied carbon is not considered by SFDR and therefore is often not measured or reported.
鈥淲orse still, it fails to promote the transformation of existing real estate, which is crucial to the pathway to net zero and to a just transition in terms of reducing inequalities of both wealth and opportunity,鈥� it says.
The report has been released after a growing number of funds categorised as Article 9 have been downgraded ahead of the introduction of SFDR鈥檚 Level 2 regulatory technical standards this month.
Real estate fund managers in particular have been grappling with what investment strategies are eligible under SFDR鈥檚 鈥榣ight green鈥� Article 8 and 鈥榙ark green鈥� Article 9 designations.
A year ago, the European Securities and Markets Authority (ESMA) clarified to INREV that a fund that aims to make a positive environmental impact by acquiring and then improving the sustainability of existing property assets would not meet Article 9 requirements. It said a fund would only meet Article 9 requirements once all the assets had been made sustainable.
Today鈥檚 report says this clarification by ESMA has 鈥渓ed institutional real estate investors and managers to identify Article 8 as the appropriate disclosure standard for sustainable activity in real estate鈥�.
Meanwhile, funds consisting of newly constructed assets might find it easier to meet the criteria for Article 9, even though SFDR is effectively ignoring the embodied carbon implicit in their portfolios.
鈥淏y ignoring embodied carbon, SFDR creates an uneven playing field that encourages unnecessary new development, accelerates building obsolescence with a risk of urban decay and results in spiking embodied carbon in the short to medium term,鈥� INREV warns.
鈥淭his mis-signalling stems from a lack of alignment between the issues most pertinent to the just transition of real estate and the criteria underlying the disclosure categories.鈥�
A survey of INREV members found that some investors were concerned about real estate funds being marketed as Article 9 funds. 鈥淭hey consider the product鈥檚 risk of re-rating to be high, which could destabilise the fund if co-investors used it as an opportunity to exit or change other terms in the future,鈥� the report says.
Jeff Rupp, director of public affairs at INREV, told 91传媒在线 that it was important to communicate to investors 鈥� and their beneficiaries, such as policyholders and pension fund members 鈥� that substantial efforts were being made to decarbonise real estate and improve sustainability under the guise of Article 8. 鈥淭his is why it鈥檚 important,鈥� he said. 鈥淎rticle 8 is not inferior to Article 9.鈥�
But Rupp also said there was a danger that the situation could deter multi-asset investors that were focused on Article 9 investments from allocating to real estate.
He said: 鈥淲ould asset allocators in a multi-asset portfolio just say real estate鈥檚 too complicated, [that] we want to be an Article 9 investor so we鈥檙e not going to invest in real estate?鈥�
