Valuing sustainability part 1: a review of sustainability consideration in valuation practice

Abstract

Purpose

The research investigates valuers' understanding of the value of sustainability in property and its consideration in valuation practice. The paper explores the extant research that has examined valuers' perceptions of the relationships between sustainability and market values, sustainability measurement, value relationships and the standards and guidelines released industry bodies.

Design/methodology/approach

This paper, part 1 of 2, reports the current state of play of valuation research in the consideration of sustainability in valuation practice and the role of industry bodies in the guidance regarding sustainability consideration in valuation. The second paper provides the next rendition of a longitudinal study examining valuation practice in Australia.

Findings

The paper provides an overview of the evolution of the consideration of sustainability in property over the past two decades. Providing insights of how the property sector, its markets and valuation professionals have responded to answering the questions of: what is the value of sustainability? Whilst earlier publications both industry and academic publications alike focussed on the normative aspects of how sustainability should affect value, more recent research starts to ascertain the implications of sustainability on property values. Despite industry bodies providing information, education, guidelines and standards, it would seem that valuers in their practice are still grappling with the challenges of understanding the rapidly evolving area of sustainability, environmental, social and governance and climate risks in valuations.

Research limitations/implications

The paper does not present as an authority on all research that has been conducted to date, it provides an overview of the evolving nature of both academic research and industry consideration of sustainability, particularly in a valuation context. This provides the background for Part 2.

Practical implications

The broader agenda of net zero, climate change, mitigation and carbon requirements, whether driven by market forces or government legislation, are generating substantial changes in property markets, as investors reconsider their positions and model the implications of carbon emissions on their bottom lines. Government policies appear to have a considerable influence over market behaviours, which filters through to stakeholder decision-making. However, despite government policies, clear market signalling and industry body guidance on valuing sustainability, the content and depth of sustainability consideration in valuation are still limited.

Originality/value

The paper provides an overview of the last decade of research into the value of sustainability and the evolving nature of information and guidance for valuers to identify, evaluate and consider sustainability in valuation.

Citation

Warren-Myers, G. (2022), "Valuing sustainability part 1: a review of sustainability consideration in valuation practice", Journal of Property Investment & Finance, Vol. 40 No. 4, pp. 398-410. https://doi.org/10.1108/JPIF-02-2022-0013

1. Introduction

The sustainability agenda in the built environment continues to gain traction due to increased awareness of the implications of climate change and the need to consider substantial mitigation approaches to minimise global warming to avoid the most severe consequences. The IPCC (2021) has stated in their recent report that, regardless of current attempts for mitigation, global surface temperatures will continue to rise till 2050; and unless substantial reductions in emissions are achieved, global warming will exceed +2 °C within the century. The urgency of emissions mitigation required as noted by the IPCC has seen markets, organisations and governments make commitments in relation to carbon mitigation and objectives to reach net zero carbon emissions, with around 130 countries setting or putting targets on achieving net zero by 2050 (UNFCCC, 2021). If these mitigation targets are not met, the consequences of climate change will be considerable for many populations globally. In particular, coastal cities will be exposed to sea-level rises and increasing extreme weather events resulting in building loss and damages; with direct, indirect, consequential losses affecting the built environment and natural capital, resulting in a raft of social costs (Warren-Myers et al., 2018; Warren-Myers and Hurlimann, 2021).

The increasing focus on enhancing sustainability of our built environments has led to the development of various rating tools and systems with which to measure “sustainability” in buildings. This includes tools for new developments and also tools that measure and monitor sustainability aspects. Often this requires investment by the owners, investors and (sometimes) occupiers; and consequently, the question arises: what is the value of sustainability? The discussion and exploration of sustainability and its relationship with value have been investigated for several decades. Since the mid-2000s, there has been an increasing body of empirical work examining a range of different real estate markets, most commonly commercial real estate and residential, around the world. Many of these studies profess to identify through hedonic analyses that sustainability, or sustainability-based ratings, has an effect on rents, sales prices, values, yields and occupancy. A subset of the sustainability consideration has been focussed on energy efficiency. The vast majority of hedonic analyses have focussed on energy efficiency and energy-efficiency-based ratings and effects on values – rents, outgoings, prices.

Whilst this comprehensive body of knowledge continues to develop, the connection between sustainability (or sustainability-based ratings) and market value (in the context of valuation practice) has not been as deeply investigated. Nor is it particularly clear how valuers are considering or treating sustainability in the process of valuing an asset. This research reviews the evolution of academic research examining sustainability in valuation and industry guidelines and standards, highlighting the emerging changes that will likely come to have profound effects on valuations, valuers and their practice and more broadly those who utilise or rely on property valuations. The paper commences by examining sustainability measurement and relationship with value, followed by a discussion of valuation practices, guidance and education. This paper sets the foundation and background to part 2 of the paper which contributes to the body of work examining valuers' practice and consideration of sustainability in valuation practice in the Australian context.

2. The measurement of sustainability

There has been a plethora of research over many decades that has tried to encapsulate and measure sustainability, as noted by Dixon et al. (2008), who stated there were already a minimum of 600 rating systems and tools in use in the first decade of the 21st century. A number of these systems have become prominent certification pathways for buildings and are now used extensively around the world: BREEAM introduced in the United Kingdom in 1990; Energy Star in the United States (USA) in 1995; Australian Building Greenhouse Rating (ABGR, now known as NABERS) in 1998; LEED in the USA in 2000 (then expanded thereafter to other countries); CASBEE in Japan 2001; Green Star in Australia in 2002 (later expanded to New Zealand); DGNB in Germany in 2006; and Green Mark Certification in Singapore in 2005, and the list continues to grow (Dalton and Fuerst, 2018). Rating systems have provided benefits in terms of being able to generate a common language to communicate sustainability requirements, even if certain stakeholders are not fully conversant on what it means. However, it has also created some confusion and challenges for stakeholders and particularly valuers to understand the nuances and comparability particularly in rating systems that have a multi-criteria approach (Warren et al., 2009; Warren-Myers and Reed, 2010). There is an extensive range of attributes of what constitutes sustainable elements in a building. This is evident by the wide-ranging number of rating systems and indices that have attempted to identify, quantify and simplify the vast array of sustainable elements in buildings, as noted above.

3. The value of sustainability

Identification of value relationships between valuation attributes and sustainability, green features and certifications, has seen considerable investigation in academic and industry research over the past two decades. Much of the earlier research focussed on how sustainability should affect value and often utilised residual development models or capitalisation approaches demonstrating how sustainability aspects such as water and energy efficiency could affect valuation and investment, for example, see Chao et al. (1999), Robinson (2005), Bowman and Will (2008), McAllister (2009) and Chao et al. (2012). Another technique for valuation applications used discounted cash flow (DCF) models, as used in Sayce and Ellison (2006), Bowman and Wills (2008) and d'Amato and Kauko (2012) to demonstrate the benefits of sustainability and the effect on a buildings' value. Although, these studies used normative foundations of how sustainability should affect value, rather than using actual evidence. This was due to the fact that there was little evidence on which to rely on in these early years of sustainability and sustainability certification in the property market. The earlier research was focused primarily on the benefits of sustainability, these included buildings that were more cost (and resource) efficient, profitable and marketable (Lutzkendorf and Lorenz, 2005) and how these related to increased rents, reduced operating costs (particularly energy and water), higher sale prices and lower vacancy (Myers et al., 2007).

Research agenda has evolved since these early hypothetical valuation analyses, to hedonic analyses of large value, sales and rental data sets, and more recent studies have utilised a meta-analysis approach to ascertain a consensus of sustainability effects on different valuation variables. Notable hedonic studies examining rating tools in particular include: Energy Star in the USA (Miller et al., 2008; Eichholtz et al., 2010; Fuerst and McAllister, 2011; Holtermans and Kok, 2019), Energy Performance Certificates (EPC) in the United Kingdom and Europe (see Kok and Jenen, 2012; Fuerst et al., 2013; Fuerst and Van de Wetering, 2015), and the National Australian Built Environment Rating System (NABERS energy) in Australia (see Newell et al., 2011, 2014; Gabe and Rehm, 2014).

More recently, Dalton and Fuerst (2018) and Leskinen et al. (2020) examined valuation variables such as rents, occupancy, operating costs, yields (or capitalisation rates) from evidence established by meta-analysis of empirical studies. These meta-analyses demonstrate the abundance of data and hedonic analyses undertaken of various property markets across the globe. In their research, Leskinen et al. (2020) examined 71 academic articles and identified a growing body of evidence that linked the normative theories to the value implications for various sustainability, green or energy efficiency features and certifications. Their analysis provided a synopsis table of the effect of green certification on the cash flow parameters and sales prices of commercial investment properties. Whilst Dalton and Fuerst (2018) examine both residential and commercial markets, with a key focus on LEED and Energy star, identifying on the whole premiums associated with sustainability and sustainable buildings. Dalton and Fuerst (2018) noted and tested for publication bias and concluded their analysis by applying the findings of their meta-analysis to a DCF model to ascertain differences in Internal Rate of Return (IRR) and Net Present Value (NPV) and the influence green characteristics make to the valuation of a proposed acquisition and development, suggesting that the emerging body of evidence is seeking a resolution to either dispel earlier normative theories or provide more structured confirmation of sustainability effects on value variables.

The analysis of empirical studies suggests many find positive relationships between sustainability and value. However, Dalton and Fuerst (2018) point to a key consideration that limits the inferences of studies like these types of meta-analyses and many empirical analyses, being the attrition effect – where there is limited research that examines the change in premiums over time. This also was noted in Reichardt et al. (2012), who suggested evidence of Energy Star premiums were decreasing in their US study of markets. Further, the implications of empirical studies and their merits in valuation practice have their limitations, as noted by Warren-Myers (2012). Stating the disconnect between the value-add empirical studies and their limitations is not appropriate for valuers to refer to or rely on these findings in valuation practice. Particularly in ascertaining the assessment of the effects of sustainability on the market value of an asset, where:

Market value: the estimated amount for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm's length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion (IVSC, 2021, p. 12).

This is importantly stated in the European Valuation Standards (TEGoVA, 2016), which links to the need for evidence and reflecting the market in consideration and assessment of sustainability and energy efficiency considerations, bringing to valuers' attention:

That opinion cannot state that something should have value, just that it has value assessed from a judgment of the available data …. There can be no general rule as to any typical pattern of premiums or discounts … (and) even where such issues are significant in the marketplace, much will turn on factors state of the market, transparency of information, location, sector, exposure to environmental risk in the region, and consumer awareness. (EVIP 1, EVS, 2016, p. 260).

This highlights the importance of data and evidence considerations and refraining from making generalisations and assumptions relating to how sustainability affects value. This also appears to hint at concern about relying on perhaps empirical studies examining value implications of sustainability in broader markets by industry or academia, further noting the nuanced consideration that may occur in different localities,

Sustainability, energy efficiency and green features can only be reflected in the valuation where this is supported by observable market evidence. There is no reason to assume that meeting or failing to meet any aspect of sustainability will generally see a premium or discount in the property's value. The impact of a feature may vary over time, between different sectors, uses or regions. (EVS, 2016, p. 263) [1].

The underpinning comparative approach requires careful selection of market comparables by valuers to compare their subject property to (including sustainability aspects), to distil certain assumptions and reflect what the market would pay for the asset in a hypothetical context. Valuers have a pivotal role in property markets, as key analysts of the market. Their role in assessing and reflecting market value in their assessments of individual properties is far reaching as their advice (despite the disclaimers often attached to it) is often utilised beyond the intended purpose of the original valuation (Warren-Myers, 2013). It is important to note that the role of the valuer is to make an assessment of the market value of an asset, not to lead the market or interpret what the market should pay. It is to reflect the value of the asset in the context of the current market, which is why the definition of market value provides the context of a willing buyer and willing seller hypothetical sale scenario. Thus, a valuer needs to consider the role sustainability plays in market actors' decision-making and to validate this through market evidence. However, much of the challenges lie in sustainability assessment and comparison, which is often more complex than a singular number or star rating.

4. Valuation practice, market evolution and sustainability consideration

The question of what is the value of sustainability in a property? is more complex when examined from the perspective of a valuer and the context in which the valuation is required, which commonly (but not always) is for market value. How sustainability should be considered and incorporated into assessments of value has a long history that also originates in early research linking sustainability attributes to valuation variables. These considerations were then explored on how these could be incorporated into valuations. Research by Sayce et al. (2004), Ellison and Sayce (2006, 2007), Boyd (2006), Ellison et al. (2007), Bienert et al. (2009a, b) Lützkendorf and Lorenz (2005), Lorenz and Lützkendorf (2008) debated and engaged with industry around considerations for investment worth and market value and how sustainability criteria or attributes should be aligned with economic considerations. Later studies by Lützkendorf and Lorenz (2011) examined information requirements of valuation professional providing key insights and frameworks for more systematic approach to sustainability consideration in valuation. A further study by Lorenz and Lützkendorf (2011) examined how existing valuation approaches could incorporate sustainability-related information. Whilst Sayce et al. (2010) suggested an index for sustainable property performance, which would be aligned with rating systems and should be developed, alongside more research to understand what particular elements of sustainability appealed to tenants and building owners. Yet, as noted by Warren-Myers (2012), who reviewed at the time the array of studies examining sustainability relationships with value, found that ultimately there was still a lack of evidence to support the assumptions and relationships relative to sustainability. Further highlighting that both the normative based research (on how sustainability should affect values) and early empirical studies had the potential to mislead valuers; and that valuation professional bodies needed to provide guidance and knowledge development opportunities to assist valuers in being able to consider sustainability as part of the comparative processes and consideration in valuation practice.

Over the last decade, extant research has focused on: development of multi-faceted sustainability criteria, features and elements; normative cost and value benefit studies; industry actors perception or use of rating tools and certification systems; and empirical pricing studies that utilise building ratings as the key sustainability indicator in which to explore the price relationships. As a result of the multi-faceted dimensions of sustainability, industry has tended to seek solutions that bundle up the sustainability considerations of a building, resulting in their focus on tools such as BREAM, LEED and Green Star which provide a range of sustainability criteria to be included but with a simple single certification outcome. In addition, popularity of single rating systems such as Energy Star, Energy Performance Certificates and the NABERS have also gained prominence, particular in Australia when the NABERS certification was required as part of mandatory disclosure legislation, the Building Energy Efficiency Disclosure Act 2010, which was introduced on 1st July 2010 (Australian Government, 2021). This signalling has not gone unnoticed by valuers, and research examining valuers' understanding and perception of sustainability, ratings and value relationships was explored by Dixon et al. (2008), Warren-Myers and Reed (2010), Warren-Myers (2013, 2016), Michl et al. (2016), Thanh Le and Warren-Myers (2019), Warren-Myers et al. (2020).

The first global survey of RICS property professionals (of commercial property) was conducted in 2006 by Dixon et al. (2008) covering the United Kingdom and Europe, Australia, China, Hong Kong, India, New Zealand, South Africa, USA and Canada. Key barriers identified were the lack of knowledge and lack of expertise and the need for further education. The “need for further education” barrier was subsequently found in research by Warren-Myers (2013, 2016) in examining commercial valuers in Australia; Michl et al. (2016) in a study of UK and European valuers in 2012; in Thanh Le and Warren-Myers (2019) comprising Melbourne institutional grade commercial valuers; and most recently, in Warren-Myers et al.'s (2020) study of Australian residential valuers. Warren-Myers (2016) reported some growth in knowledge compared to the previous studies conducted of Australian valuers in 2007 and 2011 (2013), suggesting that in 2015 valuers were demonstrating an improvement in knowledge relating to sustainability and ratings compared to previous surveys. However, the evolution in valuers' consideration of sustainability and reporting had demonstrated limited development. Michl et al. (2016) released a paper examining valuers from across the United Kingdom and Europe suggesting, despite guidance from the Royal Institution of Chartered Surveyors (RICS) released initially in 2009 and a subsequent updates (2013 and 2022) and inclusion in the RICS Red Book in 2014, limited success in valuation practice and knowledge development for valuers was found in their research. Whilst data paucity and narrow instructions from clients limited sustainability reporting in valuers' responses at the time, yet where investment value (worth) was evaluated, sustainability was more often considered and more likely to affect the value calculations, compared to a valuation for market value purposes. Thanh Le and Warren-Myers (2019) found, in a small study of valuers operating in institutional grade property valuations, that there remained limited knowledge around rating tools and a reluctance to consider sustainability. Further there was limited verification or investigation related to energy or sustainability ratings, suggesting their reluctance was related to lack of direction via client instructions, poor data access and limited tools that allowed for detailed analysis in a valuation context.

All authors with these findings have suggested that professional bodies, namely the International Valuation Standards Council (IVSC), RICS and the Australian Property Institute, should be assisting in providing further guidance. Particularly, as suggested by Michl et al. (2016) in their analysis of valuers across the United Kingdom and Europe, the intended RICS guidance (2009) seemed to lack efficacy. Another clear outcome that is common across surveys of property practitioners and valuers has been the limitations on data and comparability, with many early interviews, surveys and explorations relating to the value of sustainability, stating a lack of evidence available or paucity of data. Warren-Myers (2009, 2016) suggested that as sustainability became more prominent and prevalent in real estate markets, the market would go through stages of evolution, in the context of sustainability being incorporated into commercial properties, both new and existing, which would then have important implications for industry awareness, decision-making and reflection in valuation assessments of market value. The market evolution would assist in the knowledge development of professionals, actors, decision-makers and particularly valuers, which would increase overtime. The effect of more buildings with sustainable attributes and certifications which would hen be transacted in the market and would result in more data, thus this would then lead to better understanding of the relationship between sustainability and market value. There has certainly been an increased number of transactions over time, as demonstrated by the plethora of quantitative studies undertaken of various markets around the world, yet are valuers paying attention to the evolving market and evaluating sustainability and energy efficiency considerations of the market?

5. Evolution of valuation guidelines and education

There has been an extensive body of publications, conferences and presentations by various industry bodies on sustainability, many of which have discussed the costs, benefits and value of sustainability. This section focuses specifically on information provided to valuers by valuation industry bodies specifying how sustainability should be considered in valuations.

Over the last decade, information and guidance for valuers have primarily been provided by the RICS, who have progressively released a series of publications. The first guidance was provided by a VIP in 2009 (Valuation Information Paper VIP 13) entitled Sustainability and Commercial Property Valuation (Royal Institution of Chartered Surveyors, 2009). This was the first instruction or information directed at valuers and considerations for practice. Importantly, this VIP acknowledged that the perception of sustainability and what constitutes a sustainable building would likely change over time and that there were different understandings of the concept and that different stakeholders would likely have differing opinions as to the critical issues for them in their decision-making. The report assisted to provide a definition of sustainability for the industry and what was considered to constitute aspects under the banner of sustainability and also acknowledged:

Buildings are complex structures and every element, from design to construction materials to location, is likely to have an impact on the building's performance against sustainability criteria. Therefore, it has to be acknowledged that assessing a building's sustainability characteristics is a complex activity and that it is not a precise science. (RICS, 2009, Section 5).

On this note, valuers were directed to evaluate a building's sustainability characteristics, breaking down the different elements for consideration and suggestions of effect, in particular picking up on property performance concerns which may be affected by climate change, resource depletion (energy consumption and material supplies) and broader attributes (social, health and other attributes that may influence occupancy and demand) (RICS, 2009). Whilst acknowledging climate-change-related risks such as: extreme weather events, rising sea levels and increased flooding risk and increased temperatures and how this would subsequently affect the long-term performance of the building or asset (RICS, 2009). The VIP 13 made suggestions on how sustainability may affect different valuation variables such as: rental growth, renewal probability, terminal yield, capital expenditure, lease-up periods, outgoings and core yields, based on the normative information (albeit the suggestions at the time were based on normative theories, rather than market evidence). In 2011, the RICS VIP 13 (2009) was adapted into the Australian context in 2011 by RICS (Oceania), Sustainability and the valuation of commercial property (Australia) (Royal Institution of Chartered Surveyors, 2011), covering the content of the RICS VIP 13 and expanding to cover in the Australian context: the measurement of sustainable performance (primarily rating tools NABERS and Green Star), how valuers should use information, sustainable building issues for consideration and also valuation methodology suggestions.

RICS in 2011 released a residential guide noted as an Information Paper: Sustainability and Residential Property Valuation, RICS Practice Standards, UK. This covered sustainability assessment for residential and valuation considerations, providing a matrix directing valuers to sustainable features that may provide a value add. Similar suggestions as to the range of valuation variables and the effects sustainability may have been also made.

In 2013, RICS upgraded the 2009 VIP to a Guidance Note and then included the 2013 Guidance Note in the 2014 update of RICS Red Book, making it mandatory on members globally. The Guidance Note provided similar information to the 2009, but provided more direction in relation to the consideration of examining comparable evidence, the different value definitions and purpose of the valuation and considerations for valuers using Discounted Cash Flows. In addition, sustainability issues were related to the physical building characteristics, the impact of climate change on the location, legislation, public policy and fiscal measures and increasingly sustainability aware attitudes of both occupiers and investors, highlighting environmental risks: flooding, energy efficiency, climate, design, configuration, accessibility, legislation, management and fiscal considerations (RICS, 2013).

The Appraisal Institute (AI) in the USA has also progressively provided information and guidance on the topic of energy efficiency and green buildings. In 2012, the AI supported in conjunction with the Institute for Market Transformation (IMT), the second edition of Chao et al. (1999), entitled the Recognition of Energy Costs and Energy Performance in Real Property Valuations, Considerations and Resources for Appraisers (Chao et al., 2012). This resource covered the technacalities and rating systems related to energy costs, energy upgrades, benchmarking and associated implications for cashflows. The AI has also created Green Building Resources tab in their education page (Appraisal Institute, 2022), with a range of resources and education opportunities, in particular a Professional Development Program focused on the valuation of sustainable buildings and also books (Adomatis, 2014; Runde and Thoyre-Runde, 2017; Simmons, 2010) and guidelines on green and energy efficiency with addendums to assist appraisers in information identification and verifications (for example see Adomatis, 2018; The Appraisal Foundation, 2018). It is not clear whether there are formal requirements by the AI to consider sustainability, green or energy efficiency consideration in valuations, but it is clear that there is a structured and developed program of information and professional development opportunities available.

In the eighth and ninth edition of the European Valuation Standards (2016 and 2020 respectively), sustainability and valuation guidance has been provided in the EVIP 1 Sustainability and Valuation (2016) and later in European Valuation Standard EVS 6 Valuation and Energy Efficiency and European Guidance Note III: Valuation and Sustainability (2020).

The European Valuation Standards (TEGoVA) in 2016 first included the introduction of technical document EVIP 1 Sustainability and Valuation and provides greater direction to valuers as to how to consider sustainability and energy efficiency in the valuation process. However, this also notes:

The sustainability movement is now increasingly driven by concern over climate change and so focuses on energy and carbon issues. This bears on all aspects of a firm's business including its property and buildings. (EVIP 1, EVS, 2016, p. 251).

As noted in the EVS (2016), and more broadly, it is clear in a global context that increasingly business sentiment around net zero carbon emission targets for businesses and assets is increasing. Consequently, there will be substantial need for valuers to consider the implication of climate risks, climate resilience, mitigation and carbon reporting on values. As such, guidance and education for valuers are imperative. If further government legislation is introduced, or targets in response to COP26 mitigation objectives are introduced, there will be a need to develop guidance and standards similar to those adopted in Europe. This has clear implications as stated in the EVS (2020) where it clearly states the further implications for valuation practice and issues valuers will need to consider as a result of forthcoming policy or regulations:

A legal obligation to renovate a building to a higher level of energy efficiency by a fixed date or at a certain inflection point (e.g. rental, sale) creates an unavoidable major cost that impacts Market Value, as the owner at that date or inflection point will have to pay for renovation works.

Valuers must be aware of these legal deadlines and inflection points and when they appear, must estimate the cost of a renovation deep enough to meet the required new level of energy efficiency or future requirements that are sufficiently close to coming into force and consider the extent to which these costs affect the Market Value at the date of valuation. (EVS, 2020, p. 91)

In October 2021, the International Valuation Standards Committee released a perspectives paper ESG and Real Estate Valuation (International Valuation Standards Council, 2022), citing the increasing capital flows and corporate decision-making will be increasingly aligned with ESG and sustainable economic activities, suggesting that valuers' consideration of ESG and emissions in the process of a valuation will increase in coming years, echoing the statements made in the guidance by RICS and the European Valuation Standards.

Most recently, in January 2022, RICS have released the third edition, Sustainability and ESG in commercial property valuation and strategic advice, a global Guidance Note inferring mandatory consideration to global RICS valuation members. This document expands on the previous 2009 Valuation Information Paper and the 2013 Guidance Note, particularly of note is the encompassing aspect of the definition of sustainability, expanding in its coverage and noting the breadth of what could be considered under the sustainability terminology and its consideration in a property's performance:

The consideration of matters such as (but not restricted to) environment and climate change, health and wellbeing, and personal and corporate responsibility that can or do impact on the valuation of an asset. In broad terms, it is a desire to carry out activities without depleting resources or having harmful impacts … In some jurisdictions, the term resilience' is being adopted to replace the term “sustainability” when related to property assets … Sustainability may also be a factor in environmental, social and governance (ESG) considerations. (RICS, 2022, p. 6).

As noted by Warren-Myers (2013, 2016) and Michl et al. (2016), the education and knowledge valuers have of sustainability appear to be limited. The expanding definition and coverage of the sustainability definitions and the additional knowledge fields are explicitly commented on in the 2022 Guidance Note:

Valuers should have a working knowledge of the various ways that sustainability and ESG can impact value. These may be physical risks, transition risk related to policy or legislation to achieve ESG and sustainability targets, or simply those reflecting the views and needs of market participants … There may be circumstances where valuers lack the necessary knowledge and skills for a particular valuation, such as providing detailed cost advice or a specialist environmental risk assessment. In such cases, a valuer must reflect these limitations in the terms of engagement or as part of the terms agreed to refer to additional specialist expert advice. (RICS, 2022, p. 10).

Further, reminding valuers of the need to include in reports, pointing to the RICS Red Book Global Standards VPS 3, section 2.2 (l) entry:

wherever appropriate, the relevance and significance of sustainability and ESG matters should form an integral part of the valuation approach and reasoning supporting the reported figure. (RICS, 2022, p. 16).

The third iteration of the RICS Guidance Note also notes the current industry and movement to decarbonisation and net zero target aspirations alongside a number of other benchmarking-type certifications or reporting, such as Taskforce for Climate Related Disclosure (TCFD) reporting framework. Yet, it leaves more as a comment rather than any directions on how this should be considered or reported on, and notes an appendix table listing the range of benchmarking and certification tools, leaving valuers to conduct their own investigations into the various ratings and reporting frameworks that may be applicable in their market.

Over the past decade, the industry bodies have endeavoured to provide guidance and advice, albeit sporadically over this time. Given the market development and the rapidly evolving sustainability and regulatory landscape, more information, guidance and education are required. Industry bodies have a key role in information provision, education and also ensuring that the standards and guidance are adhered to in practice. Whilst the development of these Guidance Notes and Information Papers is a key communication instrument, as noted by Michl et al. (2016), perhaps more needs to be done by industry bodies to ensure that knowledge development, education are then applied in practice.

6. Conclusion

This paper has provided an overview of the evolution of the research, practice and standards related to identifying the relationship between sustainability and value; from the initial normative-based value discussions, to the demonstration of value connections through an extensive number of quantitative analyses of market data providing evidence (or not) to those initial normative theories. The challenge has been around how sustainability is considered in valuation practice and the challenges for valuers to identify, compare and justify value implications valuations. Despite guidance from industry bodies, and later requirements enforced through standards, it is still not clear as to what valuers' knowledge of sustainability is, and whether in valuation practice they are identifying, comparing and considering the effect of sustainability certifications or features may have on property values. As alluded to, much of the quantitative evidence has focused on industry rating certification schemes, some multi-criteria holistic tools, whilst others focus on energy. The emergence of Net Zero commitments, climate risk reporting and an increasing focus on emissions will likely drive a higher level of consideration by property actors including owners, investors and occupiers, as many strive to ensure they will meet their 2030 Net Zero targets. It is probable that sustainability, in particular emissions consideration and valuation, may become a more prominent and imperative aspect to evaluate in the process of a property valuation. This will likely be further expanded as the implications of commitments at COP26 in Glasgow and the forthcoming Intergovernmental Panel on Climate Change report (due out in 2022); see emission reporting requirements and targets to be implemented in country policies and legislation across the world.

Note

1. Recently, the update to the ninth edition of the European Valuation Standards (TEGoVA, 2020) upgraded the 2016 EVIP 1 Sustainability and Valuation, from an information paper to a European Valuation Standard, EVS 6 Valuation and Energy Efficiency. Further expansion of sustainability and energy efficiency considerations in valuation and implications for practice were provided through European Guidance Note III: Valuation and Sustainability, European Valuation Information Paper EVIP 1; with additional information also found in Section VII of the standards, which are focussed on European Union Legislation and Property Valuation with 4 Energy and 5 Environment.