The IMPACT interview: ‘Everyone in real estate should make net zero a core part of their role’

Nuveen Real Estate chief executive Mike Sales is putting impact investing front and centre of its strategy, committing to net zero by 2040 and setting up a dedicated Impact Sector. By Nicol Dynes.

Nuveen Real Estate, created out of the 2019 rebrand of TH Real Estate, is a real estate investment manager with €156 billion in assets under management (AUM) and a presence in the US, Europe and Asia-Pacific.

Since he took the helm in 2015, chief executive Mike Sales has been pushing the company to deliver on its ESG commitments on every front: from the net-zero goal by 2040 to implementing Article 9 strategies; and from creating a global impact investing sector to highlighting pay inequality and encouraging hundreds of companies to increase female representation on their boards.

Here he discusses skills shortages, Article 9 funds, plans to expand into the affordable housing sector, and institutional investors.

Nuveen has been building on the commitment it made in 2021 to reach net zero across its real estate portfolio by 2040 and to encourage creative plans to reduce emissions. How is progress going?

Key to our 2040 goal was establishing milestones for each five-year period. Our first set of mile-stones are due to be completed by the end of 2025 and we are progressing well towards them. We have reduced the energy intensity of our portfolio by 22% since 2015 and we are aiming for a 30% reduction by 2025.

We’ve undertaken net-zero carbon assessments and started working the actions into business plans for 60% of our European portfolio and we have already exceeded our goal to have whole-building energy data for 50% of our portfolio. We have a number of operational net-zero buildings being developed or redeveloped and these include what will be the first energy self-sufficient logistics buildings in Austria.

Would you say there is a skills deficit in the real estate sector – digital skills but mainly ESG skills. What can be done to reduce it?

We do see a skills deficit on ESG in the real estate sector. The only way that we will achieve net-zero carbon is if everyone who works in real estate makes this a core part of their day-to-day role. And it is crucial that this becomes mainstream for the entire value chain. Investors, property managers, developers, brokers and occupiers all need to have this as a primary focus.

While significant progress has been made, we do not see the wholescale skilling up that is necessary across the industry. A challenge we have faced in developing net-zero carbon buildings has been finding contractors who are willing to embrace new technologies and deliver buildings that use energy in a fundamentally different way.

Tell us more about Nuveen’s Tomorrow’s World approach, which provides a strong focus on ensuring investments align with the structural trends of real estate demand.

Our Tomorrow’s World approach is about basing our investment decision-making on a deep understanding of the long-term structural megatrends that will underpin demand for real estate through market cycles. The ageing population supports investment into senior living and life science facilities; digitalisation supports investment into logistics and data centres; and the transition to the low-carbon economy supports investments into green buildings.

An appreciation of these trends supports us in developing investment strategies and having confidence in long-term decision-making. This approach has been particularly vital to the development of our Resilient-Cities series, which invests in core real estate across the globe.

Last year Nuveen created a global impact investing sector and mentioned growth goals of up to $15 billion in real estate AUM by 2026. How is that drive going and how do you combine and align the E, S and G strands of the company?

We officially launched the Impact Sector in May 2022. We have been progressing quite well towards our growth target of $15 billion in assets under management by 2026.  By year-end 2023 we will have achieved around 40% of our 2026 goal in about 18 months since the official launch of the Impact Sector. We are on track to achieve our 2026 target.

‘High barriers to entry make it difficult for many institutional investors to undertake direct investments in private real assets, particularly farmland and timberland.’

Mike Sales, Nuveen Real Estate

As it relates to combining ESG, the environmental part is table stakes for our firm. We have already made the commitment to net zero by 2050, and we operate all sectors in a sustainable way. We focus on sustainability in how we build, manage and operate assets. The governance side is very mature and it is easy to track energy reduction and savings from cost efficiencies from the E.

The social element is evolving and some metrics are easier than others. As it relates to our sector and being an impact investor, we focus on amplifying the S for our residents in all our investments by providing and addressing financial inclusion, education and empowerment. For example, we provide access to educational and skill-building programmes, childcare, food services, financial literacy and credit enhancements, health and wellness and addiction support. The aforementioned is how we thread ESG together within impact investing. 

Nuveen has long invested in affordable housing in the US. More recently it has entered the German and the UK affordable housing sectors. Do you plan to expand further in Europe to deliver risk-adjusted returns as well as creating social value?

Absolutely. Our focus is on expanding deep in Europe. Specifically, we have been talking to the UK consulate in the US to evaluate further affordable housing and what a public-private partnership could look like as we look to invest deeply in underserved communities in the UK via regenerative development.

In addition, we want to continue to expand our affordable housing strategy in Germany and across the EU. When we launched the mandate, our $15 billion assets under management target was a global target, so we certainly are focused on affordable housing internationally. Specifically, investments within the UK and the broader European Union.

You recently launched an Article 9 global real estate carbon-reduction strategy, focused on reducing global carbon emissions through investment in listed real estate. What drives your belief that companies that are committed to reducing emissions have the potential to deliver superior long-term results?

We believe that companies that prioritise carbon reduction alongside NAV and cash-flow growth are in a good position for long-term outperformance for a few reasons:

• Investing in carbon reduction now is a hedge against liabilities from future regulation and carbon taxes.
• Investing in on-site renewables often yields a financial return above a company’s cost of capital, particularly rooftop solar.  Long-term renewable-power purchase agreements fix the cost of energy in an inflationary environment.
• Studies have shown that the market assigns a lower cost of capital to companies that report emissions. Green bonds can often be issued at a lower coupon than conventional bonds.
• We also believe that tenants favour properties that offer sustainable features.

From the strategic allocation perspective, which factors do asset owners take into account in outsourcing real asset mandates and defining the composition of real asset and traditional asset allocation within their portfolios? 

High barriers to entry make it difficult for many institutional investors to undertake direct investments in private real assets, particularly farmland and timberland. Gaining access and managing complex risks require proven capabilities to address three major hurdles. First, lack of market transparency. Sophisticated due diligence capabilities are essential to analyse the potential profitability and cash-flow profile of assets in diverse regions and including both emerging markets and developed markets.

Second, capital requirements. Deep financial reserves may be necessary to achieve economies of scale, provide desired geographic diversification, and invest in technology and infrastructure.

Third, operational risks. Owning and operating real assets requires regional teams with expertise in local markets to oversee investments and manage risks on the ground.

To address these challenges, institutional investors seeking the potential benefits of these alternative asset classes should identify asset managers with specialised expertise, strategic partners, global scale and a track record of investment success.

What’s your observation on the change of investment trend in real assets among institutional investors?

A recent institutional survey from Nuveen found that 59% of our institutional investors are actively rethinking their portfolio strategies. Over the next five years, 72% of investors plan to increase their private market allocations. The largest planned allocation increases are to infrastructure, private equity, private credit and real estate.