ESG considerations for Automatic Valuation Models

Environmental, Social, and Governance (ESG) considerations are playing an increasingly significant role in real estate, influencing various aspects of the industry. This talk focuses on the impact of ESG factors—primarily environmental and social (ES) rather than governance (G)—on property valuation, particularly in the context of automated valuation models (AVMs). The scope of the research is twofold. Initially, we propose the development of an ESG index/score for properties, incorporating relevant characteristics, and explore how this score can be use into AVMs. The score takes into account property specific characteristics related to environmental factors but also social characteristics mostly related to the location of the property. Our findings suggest that ESG score positively influences the predictive accuracy of AVMs, indicating that the market indeed accounts for these aspects while considering property pricing. Additionally, we examine alternative proxies for environmental characteristics in valuation, such as the Environmental Performance Certificate, which is becoming increasingly relevant in recent years. Real data from a financial institution in Greece are used to demonstrate the methodology