Preparing the for next step on the ESG journey
Sustainability has reached maturity and the real estate industry is looking at different ways to make an impact.
ESG in real estate has come a long way, experts agreed at the Sustainability, Impact & Purpose-driven Investment briefing, organised by Real Asset Media.
“A year ago net zero was a terrifying concept, but now it’s business as usual and we are able to move on to social value,” said Robbie Epsom, EMEA head of sustainability and senior director at CBRE Investment Management. “There is a lot to be done still, but it is an exciting, shifting landscape. We must not take the progress we have made for granted.”
In Europe, more and more real estate professionals are getting on with things and improving their assets and their portfolios, rather than waiting for direction from regulators.
“We haven’t progressed on social impact like we have on net zero or climate risk and we cannot wait for the regulators and the EU social taxonomy,” Epsom added. “We’re seeing investment managers, including ourselves, start to take those next steps and they’re being bold and saying ‘we may not get this right, but we need to make progress’.”
‘The proliferation of standards has become a real challenge. The rules and the definitions must be clear, otherwise we run the risk of spending money in the wrong place.’
Julie Townsend, PGIM Real Estate
“It has been a journey, but the subject has reached maturity,” said Alex Edds, head of sustainability for Europe at LaSalle Investment Management. “We know we need to integrate sustainability in decision-making at every step. We are trying to futureproof our assets for tomorrow based on the knowledge and technology available today, and make the best plan for our investments now.”
By next year there could be some guidance on how to navigate social value and integrate it with other aspects of sustainability. In the meantime, companies’ focus on social impact will help drive positive change in a systematic way across cities and communities.
Whole-life carbon rises up the agenda
No one has a crystal ball, but much can be done already to optimise portfolios.
For example, a complex subject like whole-life carbon has risen up investors’ agendas and become a key topic across sectors, not just appearing in the EU Taxonomy, but helping to inform decision-making. It is helping in the process of building an understanding of the impact of construction materials across that whole building lifecycle, said Epsom, rather than just in operational terms.
Real estate professionals are also beginning to have a more holistic view of the issues and how they are interconnected.
“We should talk about net-zero carbon and how it interlinks with biodiversity and climate risk,” said Emily Hamilton, chief sustainability officer at Savills Investment Management. “When a single issue is isolated then it becomes much harder to say that building is higher value because it’s net-zero carbon, while if that building is higher value because of its overall sustainability performance, it would be much better for the industry.”
The tendency to silo issues should be resisted, she added. “We should start to interplay social value, biodiversity, climate risk and net-zero carbon together, and if we can see those connections, then it will be much easier to work out how we can drive value.”
When it comes to action, the guidelines for building a green asset are now fairly clear, but the big question is: what strategy should be adopted for standing assets?
“Newbuilds are an easy win, the biggest challenge is existing assets,” said Edds. “Our approach is to understand the baseline. We need to be creative at an individual asset level while being strategic at a portfolio level. We own 220 buildings in Europe and have detailed plans on each and every one, but clearly there are costs associated with this.”
The European Union calculates that €3.5 trillion is needed just to renovate and upgrade buildings in Europe, plus investments of €400 billion a year in new sustainable buildings to meet its climate and energy objectives.
‘We are trying to futureproof our assets for tomorrow based on the knowledge and technology available today, and make the best plan for our investments now.’
Alex Edds, LaSalle Investment Management
“These are daunting sums, but on the positive side, new technologies are astonishing and groundbreaking,” said Dirk Paelinck, chairman of the European Proptech Association – Proptech House. “Technology will allow efficiency and cost savings.”
Technology can be an enabler at multiple levels, for example helping to prioritise interventions on buildings. It can also help to collect, analyse and present the data and report it correctly.
“There is still too wide a gap between real estate and the tech sector,” said Paelinck. “Property companies, especially the smaller ones, don’t have enough innovation teams.”
Metrics and definitions
“Active asset management is what guarantees returns and a good exit,” said Julie Townsend, executive director and global co-head of sustainability at PGIM Real Estate. “But the proliferation of standards has become a real challenge. We need to understand the metrics and use the same benchmarks to make a strong business case. The rules and the definitions must be clear, otherwise we
run the risk of spending money in the wrong place.”
The value of any intervention needs to be articulated and sustainability still needs to be ‘sold’ to raise the capital needed. But there are still question marks over definitions of what a green asset is and what impact is, and there is no clarity over standards.
“Definitions matter in a highly regulated sector,” said Epsom. “How can you persuade investors if you cannot define exactly what a green asset is? It is the same with impact: it needs to be defined, we all need to use the same terminology, and then value will start to emerge.”
Some progress is being made. Definitions on transition risk and climate risk exist, for example, but a focused conversation is needed across the market to agree on how to address remaining ambiguities.
“We’re starting to see around 10 KPIs [key performance indicators] across Europe that are becoming transactional, sort of value points,” said Epsom. “So, if you had four investment managers all trying to launch a brown-to-green product you would trust that the way they are defining brown-to-green, that 30% reduction in primary energy demand that the EU Taxonomy gives us, you trust they’re all calculating it the same way. That is a big step.”
‘Definitions matter in a highly regulated sector. How can you persuade investors if you cannot define exactly what a green asset is?’
Robbie Epsom, CBRE Investment Management
Defining these KPIs will be crucial because “the interest is there to invest in things like impact funds and sustainable funds”, he added, but there must be parameters that the market understands and the regulators recognise. The goal is to get to a point where everyone is speaking the same language and communication is easier. This will give the market and investors confidence.
“We need to be better at metrics and definitions,” said Townsend. “If we could get agreement on the top 10 metrics then we can value things better and our jobs would be easier.”
Being able to take all these steps – calculating and articulating the value of an asset and then explaining the decisions taken and communicating the values of the interventions to upgrade it – would lead to better understanding, better engagement and therefore better adoption.
“At the moment there are too many different systems and regulations and certifications,” said Hamilton. “We’re reporting to 14 different bodies now. It is something the industry has to deal with fast.”
As there are signs that in the EU there is less enthusiasm at the moment for pushing the green and the social agendas, it is more important than ever for investors and companies to be proactive and not wait for regulations to force them to do things.
At an EU level “it is difficult to get agreements between member states, some processes are slowing down and there are delays in implementation”, said Paelinck. “But nothing is being cancelled. I am optimistic that in a couple of years we’ll get very clear rules.”
