Real estate groups want changes to ‘confusing’ SFDR rules

Also claim the definition for inefficient real estate assets is 'overly complicated and unworkable'

A coalition of real estate investment groups have put together a list of problems they have with how the Sustainable Finance Disclosure Regulations (SFDR) apply to property, and are calling for changes.

The working group comprises the Association of Real Estate Funds, the European Association for Investors in Non-Listed Real Estate (INREV) and the Investment Property Forum.

The SFDR’s objective is to promote transparency on environmental and social characteristics, and broader sustainability issues across financial markets. 

However the group’s SFDR Real Estate Solutions Paper addresses what they call the “challenges” arising from SFDR for real estate investments.

One such challenge according to the group is the differences in the calculation methodologies between the Task Force on Climate-related Financial Disclosures recommendations and the SFDR’s, which the group wants clarified.

Another issue, they say, are inconsistencies with energy performance certificate (EPC) ratings among EEA member states.

To deal with this, the real estate group wants guidance “as soon as practicable” on how to  apply the Energy Efficient Buildings Principal Adverse Impacts (PAI) to the different methodologies and ratings of the EPC in each EEA member state.  

It also wants guidance on how to apply the PAI to countries outside of the EEA where the EPC does not exist and where nearly zero-emission building (NZEB) rules are not in effect.

The group also cites “confusion” surrounding what should be included under the mandatory PAI “exposure to fossil fuels”, and says the real estate sector needs more detailed clarification of SFDR in this regard. 

As an example of this confusion, they point to the extent to which the supply chain in fossil fuels should be included, and whether the storage of fossil fuels (not for use on the building) in a real estate asset are sufficient to fall foul of this PAI, or if this only applies to the sale of fossil fuels.

Should, they ask, an entire real estate asset be classed as exposed to fossil fuels, like a €250m retail park where there is a petrol station, or can a proportion can be applied by the floor area as a percentage to the value?

The group also claims the definition for inefficient real estate assets is “overly complicated and unworkable” with the separate methodology applied to buildings built after 31 December 2020, because, for example, not all parts of the EU have enacted NZEB, and similar to the EPC, NZEB is defined differently across Europe.  

Instead they want to remove the separate methodology applied to new buildings and have a single methodology for all buildings.

Abigail Dean, head of strategic insights at Nuveen Real Assets and chair of the INREV ESG committee, said: “The EU Action Plan on Sustainable Finance and the SFDR are critical to encouraging the flow of capital into sustainable solutions and I hope that this consultation response, and the recommendations within, will help the regulation to better achieve that goal.”