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REALX.Global: ESG now mainstream but impact investing is up next

Abigail Dean, Global Head of Strategic Insight, Nuveen

Now that ESG issues have finally become mainstream impact investing is next, delegates heard at Real Asset Media’s Impact Investing & Real Asset Markets keynote presentation, which took place yesterday on the REALX.Global platform.

“It is now standard for most investments to take ESG issues, like the energy efficiency of a building, into account, but they are always subordinate to the delivery of returns,” said Abigail Dean, global head of strategic insights, Nuveen. “Impact investing is different, because the environmental and social aspect are put on the same level as the financial returns and all investments have to meet those criteria.”

The emphasis so far has been on the “E” of ESG, with a focus on the role of real estate in reducing carbon emissions, but in future it will be more on the positive social impact that real estate can have.

“By its very nature, real estate investment is an investment in the community,” she said. “It can be an investment in directly socially useful buildings like education or affordable  housing or infrastructure that improves the public realm, or deliver indirect benefits by investing in economically deprived areas, creating jobs and contributing to regeneration.”

Real estate impact investing aims to combine the environmental and social aspects: a building can improve the public realm and the community and also have a low impact on the environment.

“Real estate investors can provide a hugely important input,” Dean said. “Contributing financing, expertise, networks, developing partnerships and upgrading buildings to green. Environmental improvements lead to better health and wellbeing and mitigating climate change can help reduce income inequality.”

Three essential elements to impact investing

Impact investing is a specific investment style that requires three key elements that must be integrated. The first is intentionality, which means setting out clear objectives from the start. The second element is additionality, ensuring that the positive impact the investment delivers would not have occurred otherwise.

The third element, which underpins the other two, is measurement. You need to set out the objectives, how you plan to deliver them and how you can then prove you have delivered them.

“Measurement is really important,” said Dean. “For example, in building affordable housing you can prove you have delivered the required number of units, but you must also establish the level of affordability, say no more than 30% of household income.”

Another key element of impact investing is responsible exit, she said: “You need to think about what happens to the investment if it’s been sold and to ensure that the affordable housing is not turned into luxury flats.”

Disclosure and verification, strategy and goals, sourcing and due diligence, responsible exit, portfolio management and measurement and reporting are all crucial parts of managing for impact, which defines impact investing and drives financial returns.

“Deal prioritisation is key, choosing the ones that deliver the maximum impact as well as the maximum returns and that validate that impact,”, she said. “Look at the whole process. All investments have impact, but not all are impact investments.”