Financing energy efficiency improvements in Europe’s building stock will be difficult under the current EU regulatory framework, according to a group of institutional investors.

The EU recently passed legislation aimed at improving energy efficiency by 20% by 2020, against a business-as-usual forecast. Addressing energy savings in buildings will be key, said the Institutional Investors Group on Climate Change (IIGCC), as it represents about 40% of EU energy consumption.

“Energy efficiency in the property sector is a central issue for institutional investors, who allocate an average of 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,” the group said.

The IIGCC, which represents investors with €7.5 trillion ($9.2 trillion), today published a paper with five recommendations to improve the current regulatory framework:

• The parties who pay for energy and utility costs should be responsible for energy efficiency of buildings and targeted appropriately through policy – so avoiding the ‘split incentive’ whereby a landlord is responsible for improving efficiency but the tenant benefits;
• Regulation should exploit the most relevant opportunities for sustainability and carbon improvement during each stage of a building’s life, covering initial fit-out or refurbishment;
• 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;
• Encourage fund and asset managers to report energy use, to help raise awareness among service providers such as property managers, surveyors, and letting agents; and, Introduce market and fiscal instruments – such as a price on carbon – which would help integrate sustainability risks into the investment decision-making process and influence rents, yields and values

Tatiana Bosteels, head of responsible property investment at Hermes Real Estate, said: “The technology to significantly reduce the total energy consumption of buildings exists; however current policy and voluntary measures have failed to scale-up capital investment in low-carbon technologies in the real estate sector.”

An effective regulatory framework “should be more sensitive to the complex management arrangements in place and the long economic life-cycle of buildings, and target policy at those responsible at any given time for the energy and utility costs of a building”, she added.

By Christopher Cundy
Environmental Finance