GLOBAL – EU climate regulations and demand for sustainable buildings are changing investor behaviour and the conditions of the real estate market, according to a new paper published by the Institutional Investors Group on Climate Change (IIGCC).

Stephanie Pfeifer, executive director of the IIGCC, which represents investors and asset managers worth €7.5trn, said: "It is critical investors understand and manage the implications of these changes. In a sector which accounts for 40% of final energy use and 35% of carbon emissions in the EU, supportive policies that reduce energy use in buildings will be crucial to slowing dangerous climate change."

The report – "Protecting value in real estate: Managing investment risks from climate change" – details examples of changes in market behaviour investors have recently seen that impact financial performance.

This includes low-energy certificate ratings being used to reduce acquisition prices as part of the overall transaction negotiations in France, UK and Germany, requests for energy performance certificates early in the transaction process as part of their standard due diligence processes, setting minimum sustainability standards, the introduction of formal green clauses in standard tenant leases and sustainability risk assessments prior to acquisition.

In response, leading market participants are no longer awaiting empirical evidence demonstrating the impact to financial performance from valuation analysis.

Rather they have already started to embed green building programmes in their real estate investment and asset management practices, and have developed sector initiatives and tools to mitigate these risks.

The paper, which comes after the introduction of the Energy Efficiency Directive and the recent European Parliament vote for an 80% cut in energy used by buildings relative to 2010 levels by 2050, also outlines the legislation many member states have in place driving changes in the real estate market.

In the UK, meanwhile, Aviva Investors and the UK Green Investment Bank (GIB) have announced a transaction to provide approximately £36m (€42m) of funding for a new energy innovation centre for Cambridge University Hospital's NHS Foundation Trust at Addenbrooke's Hospital.

The centre is designed to deliver substantial financial and carbon emissions savings for the trust and is expected to be one of the largest projects of this type in the UK.

UK GIB chairman Lord Smith of Kelvin said: "Non-domestic energy efficiency is a priority sector for the Green Investment Bank, and this deal is an early demonstration of our strategy to partner with co-investors and deliver a commercial return to the bank, whilst reducing carbon emissions in the UK."

The development of the energy innovation centre is being funded by Aviva Investors, through its REaLM Infrastructure Fund, and GIB, through its investment in the Aviva Investors REaLM Energy Centres Fund.

GIB's share of this investment via the fund will be around £18m.

Meanwhile, Northern Trust, in conjunction with MSCI ESG Research and ISS Governance, has created what it says is the first emerging market index that integrates environmental, social and governance (ESG) screens.

A pooled fund passively managed to this new index has also been launched.

The process comprises four steps: Three pre-screens are applied to the MSCI EM universe, followed by a sequence of checks on governance and executive independence.

These first three screens were determined based on commonalties across European investors.

The first eliminates constituent companies of the MSCI EM Index that have been found to be in breach of the UN Global Compact's 10 principles.

Secondly, manufacturers of controversial weapons such as cluster bombs and landmines are removed, and finally, tobacco manufacturers are excluded.

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