Impact of ESG (Environmental, Social, and Governance) Criteria on Land and Building Valuation vis-à-vis the Current Application of ESG by IBBI-Registered Valuers
Mr. Lakshman S.
Mr. Lakshman S. is a Civil Engineering professional with 35+ years of experience, including 14 years overseas in construction, contracts, and project management. Since 2016, he has been working in property valuation and is a Registered Valuer with both IBBI and the Income Tax Department. He is currently based in Namma Bengaluru and brings deep expertise in Land & Building valuations.
As the world shifts toward sustainability and ethical investment, ESG—short for Environmental, Social, and Governance—increasingly influences how land and building assets are valued. In 2025, this trend has matured beyond niche awareness into a crucial lens that real estate stakeholders and professional valuers must adopt. Whether for corporate disclosure, investment risk profiling, or institutional lending, ESG now has tangible consequences for property valuation.
1. Reframing Traditional Valuation Through the ESG Lens
Traditionally, land and building valuations have been rooted in market comparables, income streams, and replacement costs. However, those frameworks often ignore environmental vulnerabilities, social impact risks, or governance lapses. ESG criteria act as a corrective lens, bringing hidden risks and value enhancements into the visible spectrum.
Let’s break ESG into its components:
a. Environmental: Concerns include carbon emissions, energy use, flood exposure, waste generation, and compliance with green construction norms.
b. Social: Focuses on tenant welfare, rehabilitation, land acquisition impact, community access, and inclusive design.
c. Governance: Encompasses legal clarity, compliance status, regulatory approvals, and ethical disclosures.
2. Current ESG Integration by IBBI-Registered Valuers (As of 2025)
Level of Integration in Practice
ESG Component | Adoption Trend | Typical Application in Valuation |
Environmental | Moderate | Considered for green-certified buildings, SEZs, or environmentally sensitive zones. |
Social | Low | Primarily applied in disputes or displacement cases, and rarely monetized. |
Governance | High | Title, compliance, and encumbrances are routinely factored per IVS and IBBI norms. |
While governance factors have long been part of standard due diligence, environmental and social factors are now entering valuation frameworks—albeit inconsistently.
3. Emerging Trends Among Valuers in ESG Practice
A. ESG Risk Disclosures in Valuation Reports
Some forward-looking valuers are including ESG analysis in sections like:
- “Assumptions & Limiting Conditions”
- “Factors Influencing Value”
- “Risk Commentary”
B. Green Building Adjustments
- For LEED or GRIHA-certified buildings, green premiums of 5–10% are being applied.
- In income-based approaches, O&M cost savings are factored into DCF (Discounted Cash Flow) models.
C. Industrial and Redevelopment Contexts
Valuers are now applying environmental due diligence for:
- Brownfield sites or properties near eco-sensitive zones (e.g., CRZ, forest buffers)
- Projects requiring rehabilitation/resettlement
D. ESG-Aligned Internal Tools
Select Registered Valuer Entities (RV-Es) have introduced ESG risk matrices for:
- Institutional-grade assignments
- Lender/bank-driven valuations
- Valuation under insolvency or stressed asset scenarios
4. Persistent Gaps in ESG-Linked Valuation
Issue | Challenges Identified |
Lack of ESG Valuation Training | RVF courses rarely teach ESG quantification. |
No Comparable Market Benchmarks | Limited transaction data for green premiums or social discounts. |
Qualitative vs Quantitative Disconnect | ESG often appears narratively, but not as a capitalization rate or Discounted Cash Flow (DCF) input. |
Low Demand from Clients | Banks or developers don’t mandate ESG inclusion unless regulatorily bound. |
These gaps have created a fragmented ecosystem where some valuers are pioneering ESG inclusion, while others remain passive.
5. ESG’s Direct Impact on Valuation Methodologies
A. Income Approach
- Green buildings typically yield higher rents and better tenant retention.
- Lower operational costs lead to improved Net Operating Income (NOI).
- ESG-compliant assets lead to lower discount rates due to lower risk
B. Cost Approach
- Use of sustainable construction methods increases initial cost but adds long-term value.
- Efficient buildings may have longer effective lives, justifying upward adjustments.
C. Market Comparison Approach
- Green-certified buildings create a new comparable benchmark.
- ESG factors may introduce premiums (for compliant) or discounts (for brown assets) over the market average.
6. Regulatory Push for ESG in Valuation – 2025 Developments
a. IVS 2025 Update: Now includes explicit ESG references urging valuers to consider sustainability risks where material.
b. SEBI Influence: ESG disclosures mandated for listed entities are prompting asset-level sustainability audits.
c. Rising ESG Capital: Green bonds and ESG-linked real estate funds are rising in India, with valuation becoming a key gatekeeper.
In short, regulatory momentum is moving toward formalizing ESG as a valuation determinant.
7. ESG in the Context of NSE & BSE SME Listing
ESG credentials may not yet be listed explicitly in eligibility norms, but they enhance overall investor confidence, especially during IPOs or institutional capital raises.
Eligibility Snapshot (Unchanged):
Exchange | Eligibility Highlights |
NSE Emerge | ₹3 Cr net worth & tangible assets, track record of 3 years, max ₹25 Cr post-issue capital |
BSE SME | ₹1.5 Cr net worth/tangible assets, positive EBITDA in 2 of 3 years, ₹1–25 Cr post-issue capital |
An ESG-compliant asset base, especially for real estate-heavy businesses (infra, logistics, REIT), significantly boosts valuation credibility during these processes.
8.Practical Implications for Valuers: Follow the DATE Framework
As ESG factors gain formal recognition in valuation, valuers must adopt a structured approach. The “DATE” acronym can serve as a useful guide:
D – Disclose
Mention ESG-related risks, assumptions, and sustainability impacts under relevant sections such as “Risk Commentary” or “Limiting Conditions.”
A – Adjust
Where ESG is material, use professional judgment to modify cap rates, discount rates, or cost assumptions to reflect either risks or premiums.
T – Train
Stay updated through CPD and sector workshops. ESG valuation literacy is essential for future relevance and regulatory compliance.
E – Engage (not just Collaborate)
Go beyond collaboration. Engage actively with sustainability experts, green architects, and environmental engineers to strengthen the analysis of complex or high-value assets.
Conclusion
The year 2025 marks a tipping point in how ESG factors are perceived and applied in land and building valuation. While historically treated as qualitative footnotes, ESG elements are now moving toward structured inclusion, especially among IBBI-registered valuers, institutional lenders, and REIT assessors.
Yet, the path is far from uniform. ESG adoption is currently uneven—governance factors are well integrated, but environmental and social considerations remain sporadic, and often limited to commentary. Many valuers still lack training or clear benchmarks for ESG monetization, and client demand remains low unless regulatorily compelled.
However, change is gathering pace. With IVS 2025 explicitly referencing ESG, SEBI mandating asset-level disclosures, and ESG-linked funding becoming mainstream, valuers can no longer afford to ignore these dimensions. Green-certified buildings are already demonstrating measurable valuation premiums, and risks linked to climate exposure or social displacement are beginning to trigger red flags in lender evaluations.
Going forward, valuers must evolve—not just in reporting ESG factors but in integrating them into core assumptions, risk models, and value adjustments. This calls for a blend of professional judgment, ESG literacy, and adoption of best practices such as risk matrices and green cost modelling.
In essence, ESG is no longer a peripheral consideration—it is becoming a foundational layer of modern valuation practice. Those who embrace it early will define the next benchmark in valuation accuracy, transparency, and investor confidence.
For any clarifications or queries, please feel free to reach out to us at admin@fintracadvisors.com
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