Evolution or Revolution: ESG Investment in the Real Estate Sector


At the end of an extraordinary year of heightened demand in Environmental, Social, Governance (ESG) investments across numerous asset classes, opportunities for long-term, sustainable investing in the real estate management industry are now becoming a bigger focus.

The unprecedented extent of wildfires, floods, hurricanes and typhoons in 2018 have sparked greater concern about the effects of climate change and how policy makers are addressing it, and this growing mind-set is in turn driving an increasing number of real estate investors to ask how their capital can make an impact towards a more sustainable global economy. Is it a fad or could it be the new norm in the property markets?

The world is changing 

In October 2018, the Intergovernmental Panel on Climate Change (IPCC), the United Nation’s body for assessing climate change, released a special report warning that the world is already seeing the extreme consequences of 1˚C of global warming and recommended that governments work towards limiting it to 1.5˚C instead of 2˚C when they meet in Katowice, Poland to review the Paris Agreement on Climate Change.

Source: Natural disasters – EMDAT (2017). The number of global recorded natural disaster events in any given year, including those from drought, floods, biological epidemics, extreme weather, extreme temperature, landslides, dry mass movements, extra-terrestrial impacts, wildfires, volcanic activity and earthquakes.

The authors of its landmark report say that if the world continues to warm at the current rate, global temperatures would likely increase by 1.5˚C between 2030 and 2052 and the effects of this would be materially worse and more life-threatening than what we see today. They added that in order to limit warming to 1˚C, the world would need to cut carbon dioxide emissions by 45% by 2030.

Another report authored by hundreds of scientists from 13 different federal agencies in the US predicts the economy will shrink by as much as 10% by the end of the century if global warming is not controlled. Released on the 23rd of November 2018, the Fourth National Climate Assessment warns that heatwaves, wildfires and rising sea levels could cost the US alone billions of dollars in lost labour, missed school days, reduced crop yields, health problems and deteriorating infrastructure. Other stats estimate that US$ 307 billion in value was lost in the US in 2017 due to weather-related incidents and that 45% of global real estate investment value could be wiped out due to climate risk-related market changes.

Investors' conscious shift

According to the US Forum for Sustainable and Responsible Investment Foundation’s most recent biennial Report on US Sustainable, Responsible and Impact Investing Trends, assets of this type have expanded to US$ 12 trillion in the US, representing a 38% increase from US $8.7 trillion in 2016. This comprehensive study of sustainable and impact investing in the US says ESG investing has grown 18-fold and matured across a greater number of asset classes since it started compiling the data in 1995. In its November report, the Foundation identified US$ 11.6 trillion in ESG incorporation assets under management at the outset of 2018, held by 496 institutional investors, 365 money managers and 1,145 community investing financial institutions. The largest percentage of money managers cited client demand as their top motivation for pursuing ESG investments, while the largest number of institutional investors said fulfilling missions and looking for social benefits were their top reasons.  

Investors worldwide are genuinely beginning to appreciate the value of ESG considerations as an effective way of managing risks and improving performance. Advisors and other clients are adopting strategies to address this and with the growing availability of global equities benchmarks, such as the MSCI ESG Indexes, they are selecting, screening and benchmarking their assets against common ESG approaches and increasingly excluding any which do not conform to their ESG selection criteria. MSCI have stated that over US$ 108 billion of institutional, retail and exchange-traded fund (ETF) assets are benchmarked to MSCI ESG Indexes.

Another development over the past year was the UK Investment Association’s creation of a Sustainable and Responsible Investment committee to consult on the possibility of setting a classification of ESG funds. This followed the European Commission’s decision in May 2018 to propose new rules for asset managers and other institutional investors who have sustainability goals in their mandate that would essentially require them to prove how their investments are aligned with their objectives. The International Finance Corporation (IFC), which started working on standards for environmental and social risk management 15 years ago with its Equator Principles project, is one of the largest original impact investors with a portfolio of US$57 billion under management. In October of this year, it unveiled a set of draft principles aiming to bring clarity and discipline to the expanding world of impact investing too.


Source: MSCI.

ESG is more than just E

Major investors, fund managers and property developers in the real estate industry have become more focused on reducing carbon emissions, using renewable energy and incorporating sustainable materials into the design and management of their buildings. Real estate owners that take such future-proofing seriously can improve buildings’ resilience and efficiency and in turn help improve the risk-adjusted performance of investments in them.

But as more emphasis is placed on ESG it is becoming increasingly apparent that the trend does not only stem from environmental factors; social and governance pillars are also proving to be indispensable parts of real estate management. Employee participation, community participation, corporate integrity and board independence are considered a lot more often than before. This is due in part to another growing awareness of the positive impact that wellbeing and mental health have on businesses and their bottom lines. Combined with this is the surging trend towards better diversity & inclusion and increasing equality in the corporate environment, all of which have been driven by increased social engagement and awareness via high-profile social media campaigns, as well as greater transparency and availability of data, such as company gender pay gap data and ‘Women on Boards’ data.

Data analytics is also evolving rapidly. This is assisted by an exponential growth in computer processing power along with advancements in Artificial Intelligence (AI) and Big Data, which have empowered organisations to gather, measure and analyse ESG data; benchmark it against their peers; and, as a result, gain better insights from it. Recent high-profile corporate scandals, including the one involving Facebook and Cambridge Analytica, about the collection and harvesting of personal customer data, raise concerns about governance and how to manage risks with investors’ sentiment in mind. AI also presents risks; for example, AI-piloted drones wiping out large proportions of global fish stocks and the use of AI to spread misinformation via social media networks.

Capitalising on the real estate opportunity 

In today’s changing investment landscape, the real estate industry has been integrating sustainability throughout the investment life cycle. Major developers, architects, property companies and investment managers are capitalising on the opportunity that this creates to design and develop fully sustainable places and buildings, using SMART building technology, sustainable building materials and renewable energy. For example, the new TwentyTwo office tower currently under construction at 22 Bishopsgate in the City of London will include 1.4 million square feet of mixed use space, including bike hire facilities, a wellness spa, climbing wall and food hall, as well as dedicated co-working office and community spaces all designed to enhance the staff’s health and wellbeing.  Advanced SMART technology will also be used throughout the building to maximise the most efficient use of space and track energy efficiency.

ESG data is a double-edged sword

Several hurdles exist and investors and regulators alike are hungry for more company disclosures of ESG information. Despite huge advances in data analytics and AI there is a considerable lack of quality historical data on ESG. Legacy property assets in managers’ portfolios, which do not have the necessary sustainability requirements, pose big challenges too.

On a bullish note, great strides have been made to improve data transparency and benchmarking capabilities, with 903 real estate entities representing US$3.6 trillion in gross asset value globally being assessed and rated in the Global Real Estate Sustainability Benchmark (GRESB) ESG Index in 2018. This is an impressive increase from less than 200 participants in 2010. International organisations, such as INREV, are also increasing awareness and transparency by introducing ESG guidelines for investors, while partnerships such as the Better Buildings Partnership, a collaboration of the UK’s leading commercial property owners, are also working together to improve the sustainability of existing property stock.

Despite all these initiatives, there is not enough quality research and proven quantitative evidence on the correlation between property assets with high sustainability ratings and their performances. Nor is there enough solid evidence as to whether a ‘green’ premium in rents can be charged to occupiers for buildings with higher ESG ratings or whether ‘non-sustainable’ buildings depreciate at a faster rate. Additional ESG impact studies and analyses need to be carried out and dedicated specialist research born so the industry can address growing requirements from investors, such as how to measure and include ‘softer’ social and governance factors.

Real estate's momentum 

Despite these challenges, it is clear that the real estate investment industry is on the cusp of a major wave of structural ESG investing. Increasing economic, demographic, technological and environmental mega-trends will accelerate this. Social aspects such as health & wellbeing, as well as the need to better manage corporate governance risk, are also playing a bigger role in ESG considerations and will start to be introduced in global sustainability benchmarks. The real estate industry will adapt as the discipline itself evolves and new investment opportunities are created.

Last but not least adopting a fully integrated real estate ESG strategy is the only a way to ‘future-proof’ our buildings to make them more sustainable and resilient. Advocating best practice for health and wellbeing of occupiers and staff, as well as promoting greater equality, diversity & inclusion in our industry will ultimately improve bottom lines as well as produce better outcomes for investors.

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The value of investments may fall as well as rise and investors may not get back the amount invested. 

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CLI01327 Expiry 3 December 2019

Joanna Turner

Joanna Turner

Head of Property Research

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