GLOBAL - The regulatory framework intended to promote greater energy efficiency in the property sector across the EU needs improving if finance is to be delivered at the speed and scale required, according to a paper by the Institutional Investors Group on Climate Change (IIGCC).
Energy efficiency in the property sector is a central issue for institutional investors who allocate an average 5.5% of assets to property investments and whose investments in the property sector face significant long-term performance risks as a result of environmental issues.
Stephanie Pfeifer, executive director, said: "Existing policy is not doing enough to encourage the changes in behaviour that would drive sustainability improvements.
"The EU has said achieving its 20% energy efficiency target by 2020 could create up to 2m new jobs, with savings in the annual energy bill across the EU of a potential €200bn.
"A regulatory framework that places sustainability issues at the centre of property investment and management decisions will be essential if these targets are to be met."
Tatiana Bosteels, head of responsible property investment at Hermes Real Estate, who led the drafting of the report, said: "The key question is how are we going to find enough finance to deliver the 2020 target. The EU Energy Efficiency Directive and EU Performance Buildings Directive should help with that, but their main weaknesses lie in how they have been implemented."
Bosteels also criticised the complexity of the EU's policy framework.
"And national legislation often is not specific enough to address the complexities of the heterogeneous real estate sector," she said.
"At times, legislation is not crafted in a way that properly understands and addresses issues concerning control over sustainability and energy efficiency performance, those that pay for energy and utility costs and those who have control over a capital allocation at a specific time."
Bosteels pointed out that the UK Carbon Reduction Commitment and energy efficiency legislation currently applied to the owners of the building, while more than 80% of that energy was controlled by the tenants.
"There is a need for a parallel piece of legislation to incentivise the tenant to enter into a partnership with the owner to put together comprehensive energy efficiency programmes for the building to deliver far greater carbon savings than happens currently," she said.
The paper makes the following recommendations to address areas of weakness and improve the current regulatory framework:
• Complex management arrangements result in split incentives, where the instigator of a measure or action is not necessarily its beneficiary. Those parties who pay for energy and utility costs should be responsible for energy efficiency of buildings and targeted appropriately through policy.
• Regulation should exploit the most relevant opportunities for sustainability and carbon improvement during each stage of a building's life. Building codes and minimum standards could contain requirements for the fit-out or refurbishment during each stage of the lifecycle that would considerably impact the actual environmental efficiency of the building.
• Regulation should also shift the focus to the operation and refurbishment of the existing built stock as much as it has historically focused on new construction. This could be achieved by Display Energy Certificates, which detail the actual energy consumption of a given building in operation.
• Limited awareness among service providers such as property managers, surveyors and letting agents prevents changes in behaviour. Fund and asset managers should be encouraged to report energy use, and the regulatory framework should support the development of training among practitioners to improve sustainability skills.
• The introduction of market and fiscal instruments such as a strong and sustained price signal on carbon, carbon taxes or tax breaks would help integrate sustainability risks into the investment decision-making process and influence rents, yields and values.
Bosteels added: "Over the last few years, in particular, property managers have scaled up their skills on the issue, mainly because there has been a huge demand from investors to do so.
"But we have yet to see awareness of energy efficiency and sustainability from letting and leasing agents, although they are now mandated by law to include energy performance certificates in their marketing material."
She also stressed that the enforcement regime "could be much stronger".
"A number of existing regulations are simply not very well enforced," she said.
"We do not necessarily need lots of new regulation, but we need to get into a culture where energy efficiency regulations are as stringent for real estate as, for example, fire and health and safety standards."