IPE RE Awards: ESG to play central role in real estate portfolio resilience
Pension funds and investment managers at the IPE Real Estate Global Conference & Awards in Amsterdam this week agreed that environmental, social and governance (ESG) factors should play an integral part in real estate risk management and portfolio resilience, but concerns were raised about relying on building codes.
In a panel session on ESG and portfolio resilience, Frans Heijbel, head of international real assets at Sweden’s largest occupational pension fund Alecta, said: “It’s a given that we need to factor into the investment decision, so we think it’s definitely a source of alpha.”
Leading the discussion, John McKinlay, CEO for Canada at LaSalle Investment Management, said ESG should “absolutely” play a role in making real estate portfolios resilient ahead of an economic slowdown.
“If there’s any opportunity to harden your assets for any climactic event in advance of such a thing, you should accelerate that,” he said.
Tony Brown, global head of real estate at M&G Real Estate, said the fund manager had a “huge responsibility” to make sure assets were resilient from an environmental and social perspective.
“If you look at the Paris Agreement, it assumes that pretty much all buildings by 2050 have to be carbon neutral in operations. We’re nowhere near that now,” he said.
Elizabeth Yee, vice president, Resilience Finance, 100 Resilient Cities, spoke in favour of investors acting to protect the environment beyond their own assets.
“I would push the room to think more broadly about how we’re thinking about resiliency,” she said. “As opposed to thinking specifically about buildings, thinking about how those assets actually contribute to the overall resilience, the systemic resilience of a city,” she said.
Hans Op’t Veld, head of responsible investment at Dutch pensions manager PGGM said ESG factors formed part of real estate risk management.
“What you’re trying to do is intentionally improving, beyond good risk management,” he said.
Meanwhile Jenny Buck, head of private markets at Tesco Pension Investment, said her sceptical side wondered to what extent real estate investors were making the shift because they were being forced into it.
“From an economic point of view we know there are going to be fiscal challenges and regulation sets,” she said. “If I’m honest about it all the stuff we’re doing, we’re doing it because we’re arguably being defensive against some of the regulations that I think our societies will put on us.”
Op’t Veld also argued in favour of institutional real estate investors acting both on a broader scale and longer-term to mitigate climate risks.
“First of all flooding risk tends to be a weather event, which is fine and you can look at your portfolio, but do remind yourself most of the damage will be somewhere else where people are unable to pay for that damage, and it’s in Indonesia and around the equator where the problems will be.
“If you truly want to be responsible investor, and I would like to think we would like to be that, they need to think both about transition risk as well as the physical risk,” he said.
Of these, the transition risk was the trickier one, he said, and that just relying on standards set by building codes will “not suffice”.
He said: “What is a personal frustration of mine is that apparently we as institutional investors are still unable to demand from our developers and our builders to build not only to the current code but to a more stringent code.”
But investors were potentially able to do that, he said, adding: “I think it’s potentially a return-enhancer in a world of low returns.”
Brown said it was important for governments to get their environmental building regulations right.
“Those cities that really push the agenda on the code for buildings and environmental and social resilience — I think those are going to be the cities that get our money, those who are really pushing the boundaries on code,” he said.