Laure Ferrand, Associate Director - Head of Transaction Services

ESG Vendor Due-Diligence: How to prepare the disposal of an asset or portfolio

ESG credentials have become a huge part of the process of screening investments, and in the current market dynamics we see that ESG is a tangible route for price negotiation. Demand intensifies for best-in-class assets, leaving obsolete assets at risk of poor liquidity or intense repricing. This trend will be intensified with the (currently live) review of the Energy Performance of Buildings Directive (EPBD). It proposes that 75% of buildings will have to be upgraded by 2050, at massive cost to governments and investors alike, with the aim to upgrade all European buildings to zero-emission by 2050. 

Longevity have observed discounts applied to assets falling short of the required standard due to the additional capital costs required. This is being confirmed by Michaela Dettki at DWS: “minimum energy label or green-building certification requirements are reflected in our LOI and SPA negotiations.” She adds that refurbishment plans must be provided for all assets falling short of fund’s targets on net-zero, climate resilience or other ESG targets. 

When preparing to exit an asset or portfolio, how can one prepare for ESG and limit exposure to repricing? 

First, invest efforts in transparency. The future buyer will leverage negotiation power where there is a lack of performance monitoring, leaving too much room for uncertainty and therefore maximising risk-budgeting on their end. On a number of occasions, Longevity Partners has helped clients screen their portfolio, providing the seller with a transparent health check of the properties. Longevity’s methodology is axed around studying the market and potential buyers’ ESG expectations, then rolling out an auditing process against those performance targets. Typically, this includes assessing compliance with local regulations such as MEES in the UK or Decret Tertiaire in France, EU Taxonomy classification, Net-Zero pathways alignment, certification, and data coverage to pre-empt GRESB performance, etc. 

This exercise has two benefits: first, it allows light to be put on the portfolio’s strengths, placing its best foot forward in the sale. Second, with Longevity staying engaged throughout the QA process, this ensures any buyer’s due diligence is answered with facts around ESG performance. Where assets are not performing well against buyers’ targets, the vendor due diligence process allows the disclosure of an improvement strategy with clear pathways for the assets. This is key in ensuring that repricing is driven by the seller’s assessment rather than enduring aggressive budget planning from the buyer. 

How ESG strategy can affect a fund 

When preparing for an entity, platform, or portfolio disposal, we encourage a supplementary focus: making sure there is an explicit ESG strategy for the fund. Being able to provide a summary of ESG progress made so far, targets and actions plans will be key to conveying a message of future opportunity to the buyer. 

Mastering the ESG discussion is a key ingredient for success, as rightly put in light by a study conducted in November 2022 by Deepki, an ESG data intelligence provider for the real estate sector: 79% of 250 European pension fund managers surveyed expect commercial real estate with good ESG credentials to provide a green premium over the next five years. Additionally, according to a separate study by MSCI on sales prices of completed transactions, offices in London with a green building certification (BREEAM or LEED) command a 25% premium relative to comparable buildings without a rating. 

How can Longevity Partners help? 

We recommend contacting Longevity 6–18 months before disposal, ensuring there is enough time to set bases for key governance minimum requirements, data collection processes, certification roll-out, road mapping etc. Our Vendor Due Diligence services are fully tailored to the sale, with our experts investing efforts in the following dual focus: disclosing asset performance to mitigate any excessive negotiation; and putting the best foot forward to showcase good performance opportunities. 

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