1. Scope

The scope will consist of developing a new Guide for standardization of courses of actions, areas of review, and reporting guidelines within ESG Due Diligence Disclosures for commercial real estate transactions. The guide will focus heavily on Environmental (E) disclosure challenges and tools such as cost/benefit evaluations, transition risk identification, and risk evaluation metrics used by Banks in credit and lending determinations, by Insurance companies in underwriting determinations (COPE), and by Financial Investors in the materiality of investment decision-making. Social (S) and Corporate Governance (G) challenges and tools will also be incorporated in scope but at a lesser degree.
This guide aims to standardize the process of conducting and disclosing ESG (Environmental, Social, and Governance) due diligence for commercial real estate transactions. It will designate level of effort and analysis while focusing on addressing disclosure challenges, incorporating cost-benefit evaluations, and outlining risk evaluation metrics used by various stakeholders. This guide will serve as a valuable resource for all parties involved in commercial real estate transactions, promoting a more informed and responsible approach to ESG considerations.

Keywords

ESG (Environmental, Social, and Governance); Financial Investors; disclosure challenges; cost-benefit evaluations; risk evaluation metrics; Real estate investors; COPE; commercial real estate transactions; Due Diligence; ESG Assessment; Sustainable Finance Disclosure Regulation; real estate lending; investment decisions; climate change resilience; building performance requirements; social impact on surrounding communities; coverage determinations; property resilience; materiality of ESG; long-term operational costs; transition risk; sustainability

Rationale

The current landscape of ESG due diligence in commercial real estate is fragmented. Here's why a standard is crucial:
-Improves Transparency and Comparability: Standardized procedures ensure consistent and comparable information across all ESG due diligence processes. There are no existing standards to allow for benchmarking or evaluation. This allows for easier evaluation by different stakeholders.
-Reduces Disclosure Challenges: A common framework increases vendor technical expertise, clarifies what information needs to be disclosed and how, minimizing confusion and inconsistency.
-Enhances Decision-Making: Standardized reporting allows for a clearer understanding of ESG risks and opportunities, leading to better-informed decisions by lenders, insurers, and investors.
-Facilitates Cost-Benefit Analysis: The guide can outline standard cost-benefit evaluation tools, enabling stakeholders to weigh the financial implications of ESG factors.
-Aligns with Market Trends: ESG considerations are increasingly important for all aspects of finance. A standard ensures the commercial real estate sector stays aligned with evolving market expectations.
How the Standard will be Used: This guide will provide a framework for conducting and reporting ESG due diligence in commercial real estate transactions. Here's how different stakeholders will utilize it:
-Banks: The standard will help banks assess environmental risks (like climate change) and social risks (like tenant safety) that could impact loan repayment.
-Insurance Companies: Standardized reporting allows insurers to evaluate potential environmental hazards and social issues that could impact insurance coverage.
-Financial Investors: The guide will provide a framework for investors to assess the materiality of ESG factors on their investment decisions. They can use the outlined risk evaluation metrics to identify potential ESG risks and opportunities associated with a property.
-ESG Consultants & Due Diligence Service Providers:
The primary users of this standard include:
-Commercial Real Estate Professionals: This includes ESG consultants, due diligence service providers, appraisers, brokers, and developers who will utilize the standard framework when conducting ESG due diligence.
-Lenders and Financial Institutions: Banks and other lenders will use the standard to assess ESG risks for credit and lending decisions.
-Insurance Companies: Insurance providers will leverage the standard to determine appropriate coverage based on the ESG profile of a property.
-Investors: Financial investors will rely on the standard to make informed investment decisions based on a property's ESG performance.
-ESG Consultants: Consultants will use the standard to educate clients, perform ESG Due Diligence evaluations, and provide reports aligned with the ESG Real Estate Due Diligence standard
By establishing a standardized approach, this guide aims to create a more transparent and efficient ESG due diligence process for all stakeholders involved in commercial real estate transactions.

The title and scope are in draft form and are under development within this ASTM Committee.