Sustaining the charge

Green investment is now recognised as generating higher returns, but more transparency is needed to attract investors, as Theo Andrew finds out

Sustainability has become somewhat of a buzzword in recent years and, while the belief that real estate funds should be working harder to implement ‘green’ features into their investment is impossible to refute, what it means exactly can be harder to decipher.

To many real estate investors, if a recently-acquired asset has a shiny Building Research Establishment Environmental Assessment (BREEAM) badge or Leadership in Energy and Environmental Design (LEED) certificate, then that’s a box ticked in the sustainable column. While this can deliver positive results, there are many other environmental, social and governance (ESG) criteria which can affect the returns of a property.

As recently as July, LaSalle produced a report, Environmental Factors & Real Estate Demand, suggesting that investors focusing on environmentally friendly properties, or ‘green assets’, could achieve returns up to 65 basis points higher than they would see from investing into non-green real estate.

Factors such as lower vacancy risks, higher-quality clients and a higher value mean green assets can significantly improve the financial performance of an investor’s portfolio over time, but there is much more to consider than a simple BREEAM or
LEED trophy.

Mahdi Mokrane, European head of research and strategy at LaSalle, said: “By raising environmental considerations as worthy of close attention, we are suggesting that they will, in time, have the power to drive long-term occupier and investor demand.”

Widening your parameters

Sustainable investment encompasses more than ‘e-factors’, that is, lowering energy consumption, water and waste recycling, and carbon footprint reduction. It’s now widely regarded by many as an operation, taking into consideration every aspect of a new development or acquisition—socially, culturally and environmentally.

Earlier this year, Northern Trust Asset Management set up its Developed Real Estate ESG Index Fund in cooperation with Global Real Estate Sustainability Benchmark (GRESB).

The Netherlands-domiciled fund is an attempt to enable passive investors to incorporate sustainable investments while benefitting from long-term returns associated with listed real estate companies.

Julia Kochetygova, senior ESG research analyst at Northern Trust Asset Management, says: “We [Northern Trust Asset Management] wanted it to be a broader issue. It can be a boost to investment but also to the corporate behaviour in sustainability.”

The fund has been seeded with its first investor and, according to the Northern Trust Asset Management, it is generating interest from Central Europe as well as the Nordics, where regulations are strict on environmental standards, labour and human rights.

“If you have a sustainability index where investors can put their money, meaning you are getting an additional source of financing or growth in shareholder value, it may serve as a very good incentive for other companies to actually improve their performance and be accepted to the index.” says Kochetygova.

For many onlookers, investing sustainably into real estate is a no brainer, but while there is an increasing number of investors questioning funds’ investment protocols, many are struggling to get to grips with what is required of them.

Nina Reid, head of responsible property investment at M&G, which saw six of its funds awarded with a green star in GRESB’s 2016 survey, said at the time: “Investors and asset managers need to be increasingly alive to the range of societal, environmental and economic challenges that can very rapidly affect the success of funds and businesses.”

“Our proactive approach to responsible property investment is one way in which we protect our business and funds against shocks, and enables us to protect and enhance fund and asset performance for our clients.”

Sustaining the data

One issue facing global investors is the difference in regulations when going from market to market. What might be considered sustainable in one jurisdiction may face the wrath of red tape in another.

Commenting on LaSalle’s report, Mokrane said: “Investments in sustainability need to be customised for specific markets and sectors, as regulations and green-building rating systems vary greatly from country to country and even within countries.”

He added: “However, we expect the demand for environmentally-friendly features to grow rapidly, as both tenant and investor awareness will continue to rise.”

Certification systems across the globe are evolving, and while BREEAM may be favourable in Europe, LEED and Energy Star seem to be the popular choice in the US. Some pension plans, particularly in the Netherlands, make it a requirement that sustainability scores be factored into the investment process.

However, it is clear that there is a catch-22 scenario when it comes to signing up investors to Northern Trust’s ESG Index.

“There is a trade-off between increasing risk and improving sustainability and that is what holds back many investors from concentrating on ESG characteristics. They don’t want to lose performance or have deviating risk return characteristics of their portfolios from the standard benchmark. This is how they report to their beneficiaries,” says Kochetygova.

“Northern Trust Asset Management believes it can not only boost investment but also inherently change corporate behaviour towards sustainability and challenge investors, with “only the most willing to make the biggest commitment to sustainability reaping the benefits.”

Another issue deterring investors is the poor reliability and coverage of data on the topic, a point that means research such as LaSalle’s is widely welcomed by the industry.

In Union Investments’s 2017 sustainability study, 62 percent of the 204 investors surveyed cited a lack of transparency as the biggest barrier to investing sustainably, while 51 percent said the risk-return profile was under represented.

GRESB is one organisation working particularly hard on producing strong data in order to increase these transparency levels.

The group has data on more than 66,000 buildings and provides benchmarking tools used by more than 60 institutional investors. And it is clear the group’s efforts are having an effect.

The number of real estate companies and funds using the benchmark increased from 198 when it was first recorded in 2010, to 759 in 2016.

Once there is a reliable set of data on the way that real estate companies approach ESG criteria when they invest, then we may start to see an institutionalising of sustainable investment into real estate, and investors starting to reap the rewards.

Some investment groups however, such as M&G, like to take matters into their own hands when considering how they invest into real estate.

Tony Brown, chief investment officer at M&G, says: “We build sustainability into our investment process and we have our own [dedicated] team.”

“We believe that we’re the first real estate manager to conduct a report of our social and economic impact across our whole global portfolio. We have examined the levels of employment through our supply chain and by our occupiers, that is, our shopping centres or office buildings.”

“We have also looked at how many people come through our retail outlets every year and how much they spend.”

“Finally, we have been measuring community engagement and the overall social impact that our actions have in the economy, as it’s indicative of a wider change within the business community.”

The fact remains, however, that very few investors are willing to sacrifice returns in order to increase risk for the sake of improving their sustainability credentials.

While, according to the Union Investment survey, the proportion of institutional investors following sustainable strategies has grown by 4 percentage points to 64 percent, it is the quality of those strategies that will truly make the difference.
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