SUSTAINABILITY IN REAL ASSET INVESTMENT

Sustainability in investment is a key theme of many of the real estate and real asset industry events taking place in 2020.

REAL PropTech devotes almost its entire programme this year to considering the impact of the United Nations Sustainable Development Goals (SDGs) 2030 on the industry; EXPO Real looks at how Environmental, Social and Governance (ESG) issues are becoming increasingly important investment criteria, while PERE Europe includes a panel session on how real estate companies can turn ESG from a cost centre to a value centre.

We seem to have arrived at a turning point in 2020. Previously, what then fell under the heading of Corporate Social Responsibility (CSR) was often perceived as (and perhaps often was) accepting a reduction in profit for the greater good. In recent years, however, various pieces of research have shown that companies with strong CSR practices tend to be strongly performing companies in general. So, in fact, this is transitioning to become an indicator of a forward-thinking, strategically managed company (or project).

It is also an increasingly important element in risk management strategy. Improving investment performance by leveraging data – including sustainability or ESG data – helps to mitigate long-term risk. Coincidentally, we are at a moment in time where all this data is becoming available and relatively easily usable.

Specialised companies have emerged over the last decade to help institutional investors “manage ESG risks”. For example, market leader GRESB, which validates, scores and benchmarks ESG performance data of assets and portfolios, based on assessments completed by asset managers (and includes both Real Estate and Infrastructure asset classes). Or MSCI, which provides ESG ratings of thousands of companies and funds, as well as insights, analytics and tools to support investment processes that incorporate sustainability considerations. (While MSCI has now withdrawn from the private real estate ESG benchmarking space, and their research is not real asset specific, their reports make for informative reading – see some references below.)

According to another market information supplier, FTSE Russell, 85 per cent of EMEA asset owners (across multiple asset classes) have claimed, in 2020, to be implementing sustainable investment practices, and 63 per cent of North Americans. The company’s annual survey shows that, this year, investors have moved towards re-weighting or “tilting” their investment criteria to focus more on ESG, rather than simply using a negative screening process – the most common approach to ESG up until this year. We can conclude that a more of a “ground-up” approach is becoming prevalent, enabled by technology.

While the findings referenced above are general (not specific to real assets), the majority of the factors cited affect the world of real assets. “E for Environmental” is certainly the dominant ESG factor in this sector, however. Building certifications such as BREEAM (Building Research Establishment Environmental Assessment Methodology) have gained traction in recent years as a result, adding measurability to this factor.

If we believe research results indicating a shift towards sustainable investment practices, we would conclude that building and infrastructure projects which acknowledge and minimise their impact on the environment are likely to be rewarded by investors in the coming years – low carbon and otherwise sustainable construction, projects that use technology to reduce energy consumption by future occupiers, projects for the construction of renewable energy infrastructures, etc.

The view of the agenda-setters at REAL PropTech appears to be that the UN Sustainable Development Goals (SDGs) 2030 will also force the hand of our industry in this regard, with numerous construction requirements related to reduction of CO2, via more efficient processes and more sustainable materials. The 2030 Goals – reinforced by the COVID19 pandemic – are likely to increase the importance of the “S for Social” element of ESG in our sector, making the likes of human health and well-being more of a concern for real asset developers, owners and investors.

Avoiding long term risk and maximising exit value is important. But beyond that, many are arguing that our industry has something of an obligation to lead on sustainability. As pointed out by REAL PropTech: “All industries need sustainable infrastructure and logistics. We plan, build and operate them. This obliges a culture of innovation in real asset investment.”

Or in the words of the Royal Institute of Chartered Surveyors (RICS), the land, construction and real estate sector “has a substantial sustainability impact through land development, resource use, waste generation and labour practices throughout its life cycle.” A 2017 report by the RICS, referenced below, includes a detailed explanation of the sector’s impact throughout the three lifecycle phases and its relevance for implementing each of the SDGs.