Peter Cosmetatos has been involved with commercial real estate finance for more than 20 years. In 2013, he became chief executive of CREFC Europe, the trade association for the real estate finance industry in Europe. Its mission is to promote transparent, liquid and sustainable real estate debt markets for the benefit of its members, the wider industry and ultimately the economy as a whole.
Peter knows the real estate investor world well, having spent five years as Finance Policy Director at the British Property Federation, the trade body for the UK real estate industry. At the BPF, Peter’s role involved formulating and articulating industry views on finance, tax and regulatory matters, with an increasing focus on financial sector regulation and the factors affecting the flow of capital into commercial real estate.
Before joining the BPF in 2008, Peter worked as a tax lawyer in the City with a particular focus on property finance. Before becoming a lawyer, Peter read modern languages (Russian and Italian) at the University of Oxford.
1. How does CREFC Europe influence the real estate finance world in relation to ESG?
CREFC Europe’s overarching aim is to help lenders develop the shared understanding, standards and tools that can help them drive decarbonization of the built environment in a way that works for society as well as for business and investors. Partly, this involves catching up with real estate sustainability leaders. There is also an advocacy element, because regulation has a key role to play but it is not yet fit for purpose, and clarity and certainty about its future trajectory
are lacking.
2. Has the acceptance of and commitment to Green Bonds and similar products become universal or is it still localized and patchy?
Green Bonds are more relevant for REITS, some large asset managers and the CMBS market. General loans will be influenced by the LMA (Loan Market Association) and the TCFD (Task Force on Climate Related Financial Disclosures) will define data points for regulatory disclosures for much of the market. For secured real estate lending, the exciting opportunity is to capture actual data on energy use and use that to drive decarbonization. The Green Bond market is huge and established, but it isn’t designed to operate at that level. For real estate finance, sustainability-linked products that incentivize improvements are more important than those that simply reward buildings for being ‘green.’ Given the fragmented ownership of real estate and the fact that the ‘long brown tail’ of owners lacking sustainability expertise is disproportionately at the smaller end, we will need standards beyond the LMA documentation used by the bigger end of the market. Disclosures, covenants and so on at the loan level also need to line up with green lease terms so information, as well as incentives, can move along the chain between the users, managers and financiers of buildings.
3. Is it fair to say that most companies you deal with have ESG strategies embedded within the broader corporate goals, or are they still siloed?
Climate issues hit the RE finance industry in late 2019 after lots of discussion in previous years. Intuitively I like the embedded approach to sustainability (we’ll know the market is investing and financing sustainably when you don’t need to call it “sustainable” investment or finance any more), but I think firms have to take the scenic route to get there. A lender needs to develop some sustainability expertise and link it to the relevant business line so it can figure out how to embed it into strategy, products, KPIs and communications. At that point, it should be embedded.
At the moment, more of the pressure for ESG products and credentials is coming from the market than from law and regulation. That means there’s lots of subjective box-ticking and not a great deal of transparency or consistency about what matters and how it is measured. I would like to see much more clarity from firms as to what an ESG strategy entails: Are they giving up returns in favor of a moral stance? Or do they have an economic rationale for their ESG strategy that is justified through risk-adjusted returns?
The latter strikes me as much the more reliable foundation, but it is hard to build unless regulation and its future trajectory set clear compliance requirements for buildings, from which value implications can be inferred.
4. How are you seeing the workforce being upskilled — is it a pro-active or reactive process?
There’s a bit of both, but the training component is important as most teams are still under-skilled, and people need to understand the new, sustainable products that they are offering. Firms need to hire people who WANT to do it — it’s not enough simply to appoint an ESG specialist and expect them to impose it.
There’s a lot for people to learn — not least the fact that the greenest building is the one that’s already standing (knocking down a building with embodied carbon is not a green way to upgrade the real estate stock).
Lenders tend to lag the institutional equity investors that are leaders in the sustainability space, but as they upskill and develop the right product range, lenders can offer bundled advice and finance for the less sustainability-savvy property owners out there.
5. How much focus on ESG strategies are you seeing from debt and equity investors? Is it now in the mainstream, or does it remain a work in progress?
Take up by the main debt and equity investors is broad, and probably roughly equal, as lenders have caught up. The key is formulating a strategy that can be converted into the business plan. Smaller equity investors are the least aware. Some really exciting and inspiring ideas have emerged from the lending side
One is CPF Green Buildings, a Dutch platform used by the likes of ING for many years in the Netherlands and more recently by banks like Lloyds in the UK. It allows a lender to help its SME real estate borrowers identify and finance retrofit opportunities that make both financial and carbon sense.
Another is CarbonLite from Atelier Capital Partners, a small-ticket residential development lender that is building a network of partners and advisers for sustainable lending based on the RIBA 2025 and 2030 frameworks. I gather this has involved a lot of hard graft, but the reward lies in the potential to scale efficiently.
6. A recent BNP Paribas ESG Global Survey suggested that 79% of institutional investors are expected to make ESG central to their portfolio in the coming years. What time frame would you suggest that takes?
It depends how you define “central to a portfolio”. In spirit, you could say we’re already there; in terms of consistent execution, it may take another five years. You need clear regulatory measures to drive it, with a link to value and timing. Increasing adoption of tools like CRREM can also drive this, at least as far as the decarbonization piece is concerned.
7. How does your organization define S and what/whose measurement do you subscribe to in calculating it?
We are doing our bit for promoting adoption of industry standards by NOT having our own definitions. I believe the UK Green Building Council has a good framework for social value, so that might be a good place to start. I do think it’s important not to focus too much on the fact that S is hard to measure and carbon is (relatively) easy to measure. You can’t deliver sustainably on the E without the S, incorporating how your investments or financing activities affect the people and communities they touch into the effort to improve climate resilience and reduce climate impact.
8. Who (which role) should be accountable for driving the ESG agenda and should compensation be driven by successful implementation?
The CEO must drive the message from the top and begin to recruit people at the lower level who care about it. NEDs with specialist knowledge should ask the questions around ESG and hold the CEO accountable.
9. What appetite have LPs shown to accept eroded margins in pursuit of ESG compliance and where is the weighting on those three components?
There appears to be very little consistency on how LPs assess ESG when determining which funds to invest in. Inconsistency doesn’t encourage fund managers to form a strategy. I gather that INREV and the ICMA have been working on this to assess/measure risk.
From a CRE credit perspective, the time horizon of a lender is usually shorter than that of an equity investor. Unless an asset is obviously at risk of flood or fire, say, or nearing obsolescence, the lending decision is unlikely to be seriously impacted by climate considerations. If lenders are to recognize longer-term climate risks as economically relevant to their transactions, I think regulation needs to focus minds on those risks by converting them from distant externalities into compliance matters with value impact today.
That kind of regulatory approach can also address the big concern for sustainability leaders, that being forward-thinking will impose first mover disadvantage on them. Absent of regulation, the industry can collaborate through industry bodies to set good practice standards that raise expectations across the market.
10. Do you envision E, S & G being split out as separate corporate measures and if so, by when?
E, S and G should be looked at and acted on independently and then each pulled together for a cogent strategy. If you can’t integrate ESG numbers into your credit assessment, then
you have a problem. It cannot sit outside the modelling.
In closing, Peter is heartened to see the pace of change, learning and the development of strategies to address ESG. It has only really been tackled head-on in the past 2-2.5 years, so there is still a way to go! A key near-term question will be the degree to which the changing macroeconomic environment leads to a softening of political will to drive decarbonization in particular – but it seems clear that the leading edge, institutional end of the market will remain focused on ESG over the coming years.
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