Environmental, Social and Governance (ESG) & Responsible Investing is increasingly affecting Asset Managers across asset classes, and Real Estate (RE) is no exception to this. This is not surprising given the generally long-term investment horizon for Real Estate (which increases the materiality of ESG issues) and the fact that the sector already has long-standing frameworks in place to measure ESG performance.
Against a backdrop of rising demand and expectations from clients and regulators – which has only been ramped up by COP26 in November – firms should be asking themselves: who will buy or rent a primary office or retail location with poor ESG credentials? Similarly, how will we raise capital if we are a laggard in ESG?
Rising demand to make a difference
There is no doubt that Real Estate investments can be massively impactful. The Government has identified the residential sector as contributing 15% of net greenhouse gas emissions in the UK (Office for National Statistics, 2021) and, to a greater extent than many other asset types, the property sector is inextricably linked to conversations around labour practices, affordability, and product safety.
It is clear though that investors view ESG factors for Real Estate not just from a risk perspective but also as performance opportunity. This helps to explain the growing popularity of these assets: a recent Infrastructure and Real Assets survey of global institutional investors (responsible for $20tn in assets under management) found that over 90% of them expected to increase their ESG real-asset investments over the next five years (Financial Times, 2021). Firms who fail to respond to this may find themselves increasingly out of touch over this period.
How can Asset Managers keep up?
1. ESG factors need to encompass the entire RE investment process
In order to stay relevant, firms will need to provide an accurate and exhaustive view of ESG performance in Real Estate which captures the full investment lifecycle. Some key points which Managers need to consider at each stage are outlined below:
2. Data challenges must be addressed
Asset Managers must produce standardised ESG data in order to verify that a portfolio is successfully achieving or exceeding its targeted ESG-related objectives, including for measuring aspects such as social improvements which can be harder to quantify than environmental impacts.
The process for producing ESG data for Real Estate can be complex and contain several dependencies which need to be managed by market leaders. These dependencies include ESG data:
- Originating from different sources (investment companies, property managers or even tenants themselves)
- Arriving in different formats (and often being recorded manually in spreadsheets)
- Being handed off to third-party data providers for processing and analysis
3. Benchmarks must be navigated
Real Estate industry respondents to recent FCA consultations generally agree the most appropriate methodology for measuring impact in the sector is the Carbon Risk Real Estate Monitor (CRREM). The UK regulator and the Task Force on Climate-Related Financial Disclosures (TCFD) are considering whether CRREM could become the new global methodology for this asset type.
Competing benchmarks are already in use however, with the Global Real Estate Sustainability Benchmark (GRESB) being a prominent example. The GRESB issues annual surveys covering topics such as energy, carbon output, and how employees are treated for a more holistic view of the “S” and “G” in ESG.
Firms need to respond to the latest guidance and best practice on scoring frameworks while also being mindful of their limitations – for instance Managers should be looking at the future impact of investments rather than looking at the present in isolation, and be focussed on ESG data at the asset level as well as at the fund level.
Alpha believes that those who are looking to distinguish themselves in this area should be moving beyond certification and should be able to tell a story about ESG which is measurable and backed up by appropriate data.
This approach may not be straightforward and requires “ground up” data gathering, but the direct collaboration between different stakeholders (tenants, property managers, fund managers, asset owners) should be viewed less as a burden and more as an opportunity to enhance client experience through digitisation (for example) or by articulating wider benefits to stakeholders such as greater financial returns through lower energy bills.
Leaders in this space should also be demonstrating takeaway actions in response to scoring methodologies. Meeting the latest rules is one thing, but with asset flows and investor sentiment only trending in one direction, compliance alone may not be a viable commercial strategy for Real Estate Managers in the medium-term.
How Alpha can help
At Alpha we have a well-established track record of helping clients navigate the complexity surrounding ESG. Adding to this our expertise in Real Assets, we are well placed to provide the insight needed to stay ahead of the above challenges and assist with the right steps towards implementing scalable data and reporting solutions.
Some of the services we can offer include:
- ESG Healthchecks – our dedicated ESG team can conduct a targeted review of your end-to-end operating model, helping you to quickly identify and re-align potential deviations with your key strategic objectives.
- Data Model Optimisation – our digital and data experts can help you design and deliver a data strategy that effectively incorporates ESG considerations across the value chain while ensuring transparency, consistency, and scalability.
- Service Provider and Vendor Selections – we can help you identify and integrate third-party providers of ESG data or solutions that meet both your current and future requirements.
- Regulatory Change & Client Reporting – Alpha can help set-up and optimise your ESG reporting capability, to ensure it meets expectations of both your clients as well as the regulator.
To learn more or speak to one of our experts, please reach out to Alpha.