APG, which manages €530bn in Dutch pension assets, has launched what is thought to be the first listed real estate index to filter out companies not aligned with Carbon Risk Real Estate Monitor (CRREM) net-zero pathways.

The index is designed to give pension funds passive exposure to listed property markets while also avoiding and companies that have poor sustainability performance.

The development of the iSTOXX APG Real Estate CRREM-aligned Responsible Investment Index comes two years after APG launched several sustainable equities indices for clients, including pension fund BPF Bouw.

Rutger van der Lubbe, head of global real estate investment strategy, told IPE Real Assets that APG was responding to demand from some of its investors to replicate the sustainability index approach to the listed real estate sector.

APG manages the real estate investments of three pension funds: ABP, the civil service scheme and largest pension fund in the Netherlands; SPW, the pension fund for housing corporations; and PPF, APG’s own pension fund.

Rutger van der Lubbe

Rutger van der Lubbe: Index represents “enhanced version of passive investing”

Van der Lubbe said ABP would continue with its long-running “global actively managed listed real estate” strategy, but the index would appeal to other pension fund clients. “This product is very tailored to the demands of our smaller pension fund clients,” he said. 

By applying various responsible-investment criteria, including Paris-aligned carbon-emission intensity, the index has filtered out 240 companies from a global universe of 370.

The remaining 130 companies are therefore deemed to be aligned to CRREM, a widely used net-zero tool for the real estate industry, have strong ESG credentials.

APG is one of several institutional investors that have provided funding to CRREM, originally an EU-funded initiative, to expand globally. “We have been strong advocates of this particular initiative,” said van der Lubbe. “To our understanding, this is the first index application of CRREM compliance in a listed industry product.”

As a passive solution, the index is not able to directly influence the behaviour of listed real estate companies in the same way that an active strategy can, but it is comparatively more cost-effective, van der Lubbe said.

“Although there is a very strong ESG integration in the product, there is no engagement that we would do with the portfolio holdings to improve their performance in this regard,” he said. “Whereas in an active strategy, we would obviously have regular dialogues with investee companies.”

However, van der Lubbe described it as an “enhanced version of passive investing”. He explained: “Clients could have also opted to merely track an already existing global property index. But with the criteria that have been built in into this particular index, they acknowledge that ESG is important. With the embedded CRREM compliance, the entities within this product are at this point in time compliant with clear science-based targets which have been deduced from long-term policies.”

The index could also have an indirect influence on the behaviour and reporting of companies. Van der Lubbe’s hope is that real estate companies become aware that if they are to be included in the index, they need to be CRREM compliant.

“If they’re not, they will not be considered in the index composition and will not form part of the product,” he said. “Having these criteria made explicit I think helps companies understand what it is that we expect from them.”

The constituents in the index are likely to change over time, reflecting changes in the industry, but also changes to the index criteria. “It will indeed be subject to future change, because the criteria will be tested periodically, and consequently there may be new entities added,” van der Lubbe said.

“It may also be that the current index constituents may no longer adhere to the criteria that are being applied though, so there will be fluctuations in the investable universe and hence why the index will be periodically rebalanced.”

APG: 25 years of investing in listed real estate

APG has been investing in listed real estate for more than 25 years and has long pursued a strategy of combing both public and private real estate in the same portfolio. Earlier this year, it won the award for best listed strategy at the IPE Real Estate Global Awards in Milan.

“We have been for a very long while now managing a global integrated real estate investment strategy,” said van der Lubbe, who has been with the organisation since 2001. “By integrated we mean that we invest both in public as well as in private entities. And then next to that we have also dedicated global listed real estate strategies, of which this product is an example.”

He added: “So we have been long-term advocates of an integrated real estate strategy in the belief that listed real estate ultimately is real estate – it’s just in a different wrapper – and that one should measure risk and return for real estate investments longer term. The longer you measure, the more listed real estate behaves as a private real estate investment. 

“Obviously, there are short-term volatilities that are undesired by certain investors. We represent very long-term capital, though, so we believe that by having an integrated strategy we can actually leverage on market inefficiencies and can tap into the best available investment opportunities as we see fit.”

Van der Lubbe said he was seeing among institutional investors an “increasingly greater following of that long-held belief within APG that listed real estate is real estate”. He said: “There’s also more and more [academic] research that indeed supports this view, and we see more and more investors also going down this route.”

That said, there are benefits that are exclusive to private real estate – something that APG has made clear in the past. “Some of these benefits are also ones that we advocate ourselves,” he said. “In the private investments that we typically pursue, we have far greater influence or sometimes even control over the strategic direction of those entities, then we would typically do in listed entities.

“In listed entities, one is typically a minority investor, and [is] somewhat limited in its ability to change or influence the strategic direction of companies. And hence why that particular argument is typically strong for some of our clients to have a preference for private real estate investments over listed ones. But, on the whole, from a risk-return perspective, there’s a lot of evidence out there that it’s essentially the same.”

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