The challenge of putting ESG into practice

During a climate-change debate at the IPE Real Estate Global Conference in Milan last year, fund managers and investors effectively called on the real estate industry to provide better data on the energy efficiency of buildings.

A number of certifications, such as BREEAM and LEED, already exist, but they tend to gauge how efficient a building could potentially be, rather than how efficient they are in practice.

David Ironside, fund manager at LaSalle Investment Management, who moderated the panel, said LaSalle had been “signing a lot of green leases” that request tenants to provide their energy data, but he said new regulations were required to act as a catalyst.

Abigail Dean, head of sustainability at Nuveen Real Estate, said this was one of the most significant challenges for ESG-minded real estate investors.

Here, we look at how fund managers and investors have to search out the data they need to effectively monitor their ESG performance.

Pieter Roozenboom, global head of responsible investment management at CBRE Global Investors, says: “You can have a very efficient car but if drive it in the wrong manner, the car still consumes quite a lot of fuel, and it’s the same with buildings.”

The issue of data and measurement also applies to the ‘S’ in ESG. A number of social-impact real estate strategies have been launched in the past year, suggesting a growing interest in the area from institutional investors. But one of the big issues is how to measure impact and assess performance.

As head of sustainability Debbie Hobbs explains, LGIM Real Assets is committed to measuring social value across 20% of its portfolio in the UK. The fund manager is working with the Social Value Portal, a platform that allows organisations to measure and manage the social value they generate. She says: “The issue we have at the moment is that people are measuring social value in different ways. The Social Value Portal has 30 local authorities who are all measuring in the same way.”

In Australia, the country’s superannuation funds are striving to maintain their market-leading position on ESG, just as its government has passed the Modern Slavery Act – see here.

In response, the Property Council of Australia is working on a platform to address human rights abuses in the real estate supply chain. Ruben Langbroek, head of Asia-Pacific at Green Real Estate Sustainability Benchmark (GRESB), says: “Super funds want their real asset investments to generate environmental and social impact. Impact investing has shifted from a niche concept to a mainstream investment strategy that is rapidly becoming more interesting for investors as they come to understand that they have a unique power to drive positive outcomes in the property sector.”

Nicole Bradford, head of responsible investment at Cbus superannuation fund, says: “We don’t believe that incorporating responsible investment involves such a trade-off. It should drive better, more sustainable, longer-term returns.”

As ESG becomes integrated into the central investment processes of institutional real estate and infrastructure investors, the tension between the need to maximise financial returns (the ultimate objective for institutional investors) and environmental and social concerns has come into clearer focus. The two objectives can compete with each other, but they are no means mutually exclusive.

In fact, the most experienced infrastructure investors have quickly learned that returns can be

too high – specifically, if they are generated at the cost of consumers. If critical infrastructure is made too expensive for its end-users, it can increase reputational risk and the potential for political intervention.

Successful infrastructure investment strategies are in part about balancing the returns of investors and delivering what society needs. “We view ourselves as responsible long-term owners of infrastructure assets that deliver essential services to communities,” says Karl Kuchel, CEO of Macquarie Infrastructure Partners.

Infrastructure could come to play a central role in the wider ESG movement. “Consideration of ESG factors comes fairly naturally to private infrastructure investors,” says Stephen Dowd, partner and head of infrastructure investments for CBRE Caledon Capital.

“One of the key characteristics of infrastructure is that the assets provide an essential service, and when you’re providing an essential service, you have to be dealing with the relevant government authorities, whether they’re political or regulatory, and you need to be engaged with your community as well. Adopting ESG policies and targets can provide a more formal framework, but infrastructure investors are engaged in those issues, and that sort of discipline comes naturally.”

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