Sustainability is growing in importance with environment, social, governance (ESG) factors now a mainstream set of considerations for investors.
Fergus Hicks, real estate strategist at UBS Asset Management, explains:
“In order to meet the targets of the 2015 Paris Climate Agreement, environmental regulation is set to get stricter in the property sector. CO2 taxes on building emissions as well as energy consumption thresholds are potential tools of this approach. Sustainability regulations are, however, also reaching out beyond just energy efficiency. For instance, some local regulations might require buildings to comply with social standards, with a main focus on comfort and safety in and around the property. As the urban environment densifies, architectural quality, the organization of communal areas and recreation areas will become more important.
“Investors (institutional in particular) are also increasingly embracing ESG when deciding upon real estate investments and external fund managers. In 2019 PERE ran a global survey of institutional investors in the real estate sector. 43% said that they would not invest with a fund manager who did not have an ESG policy. Negative screening to ensure minimum sustainability requirements are met is becoming ever more popular when selecting real estate products and managers. One third of all EMEA respondents have already built this filter into their investment processes. Primary beneficiaries of institutional real estate investments are also at the forefront of this evolution; eg, pension fund members are increasingly vocal in demanding greater ESG transparency.”
New ESG preferences of property users are also changing real estate. This is especially true with the commercial sector, with occupiers vountarily disclosing more about their corporate responsibility and the environmental impact of their businesses. Sustainability indicators such as these for the property being leased can be a factor in assessments, automatically placing new demands on commercial leases.
Most managers around the world have already built ESG into their decision making, according to the Global ESG Real Estate Investment Survey in 2019 by Bentall Kennedy, Realpac and UNEP Finance Initiative. Approximately 90% of the investment platforms analysed, which manage around $1,100 billion worldwide, include ESG reporting in their processes, UBS cited from the survey. The survey also reveals that asset managers are placing greater emphasis on social responsibility, sustainable corporate management and the circular economy, in addition to just energy-related matters.
Fergus Hicks added:
“The integration of ESG factors by the real estate industry is leading to new measurement, reporting and comparability requirements. Comprehensive sustainability strategies require analysis of data on real estate portfolios and lessees, in turn demanding the production and management of significant quantities of data. The use of new technology is essential if a range of sustainability KPIs is to be efficiently and economically reported on.”