There has long been a swathe of different acronyms adopted by the asset management industry. Firms across the entire breadth of the investment universe have often coined and looked to live off certain buzzwords to bring a particular style or strategy to life as the next ‘flavour of the month’. But it is clear for all to see that the potent coming together of Environmental, Social and Governance factors over the last few years to make the phrase ESG, does not fall into the same category. The real estate industry is certainly no stranger to this revolution, but its success in demonstrating its environmental and social impact hinges on a variety of different factors – none more so than standardisation of reporting and data.
Why should investors embrace ESG?
Many commentators would say that it is quite simply, ‘the right thing to do’. Although there is of course increasing regulatory scrutiny and requirements to adhere to, that really doesn’t tell the whole story. ESG is not just the latest inductee into the sector’s ‘alphabet spaghetti’ hall of fame, it is the real deal.
Adopting a sustainable approach to investment has proven its ability to not only uphold moral or ESG standards, but moreover to improve long-term investment performance.
Recent research conducted by Morningstar illustrated a direct relationship between funds implementing ESG criteria and strong investment and financial performance. This could go some way to dispelling the myth that there is an inherent ‘greenium’ in investing ethically and that investment performance suffers if ESG is front and centre.
Moreover, ESG characterised funds have shown their ability to perform in the wake of the COVID-19 pandemic. Research conducted by S&P Market Intelligence showed that the vast majority of the ESG ETFs surveyed outperformed the S&P 500. Therefore, investing responsibly produces robust performance in both calm and choppy waters.
Beyond pure performance, there is also clearly a commercial and competitive benefit of ESG investing. The Investment Association’s ‘responsible investment’ classified products dominated retail fund sales in 2021 – most notably in September when they made up two thirds of total net retail sales at £1.6 billion. And these trends are undoubtedly being mirrored in the institutional investment universe.
So, the direction of travel is clear but why are sustainable considerations particularly relevant to the real estate sector?
Real estate asset management is long-term by nature as is dealing with ESG issues most effectively. Assets are often held for longer periods than their equity and fixed income cousins. Therefore, real estate investors have a more complex set of procedures, challenges and milestones to manage throughout the investment lifecycle.
With thinking long-term, comes patience. For example, the initial costs of building sustainably may be off-putting for some, but alongside the environmental impact investors may benefit from lower heating costs in the future. Similarly building green can often lower operational costs and attract more profitable rents and higher occupancy rates.
Everything is local
Localisation is another crucial factor when marrying ESG and real estate together. Although a global industry, all real estate investments are connected to a specific location or geography. As such it is vital that investors take local environmental conditions and regulatory requirements into close consideration when making investment decisions.
There is no hiding away from the fact that construction and the operation of buildings is one of the major sources of global carbon emissions. Therefore, the real estate investment industry has an influential role in helping regulators and governments hit their carbon neutral targets. Alongside the global initiatives and net-zero objectives, there are also a number of different local requirements real estate investors need to be aware of.
Therefore, it is vital that real estate investors clearly articulate how they are integrating ESG factors into their investment strategies and the tangible impact they are having on society and the environment.
Cutting through the noise
One of the issues both clients and investment firms alike have been battling with has been a lack of a truly standardised or common definition of what ESG actually means. Regulatory initiatives such as the Sustainable Finance Disclosure Regulation (SFDR), which aims to harmonise ESG disclosure and transparency, are paving the way for greater uniformity but there is still a role for the industry to play.
So how can real estate investors cut through the noise and show how they are investing sustainably and responsibly?
For us the answer is simple – digitalisation to produce high-quality data. As the saying goes, ‘the proof is in the pudding’ and with greater regulatory pressure, investor appetite for ESG focused strategies, real estate investors will have to be able to prove their credentials and avoid joining the bandwagon of ‘greenwashers’.
How can we help?
Drooms can assist real estate investors in delivering this by giving a digital and standardised home for all of the critical ESG issues that need to be considered for every deal. This home, or as we call it a data room, can also be seamlessly integrated with other software, for example, environmental management systems making the access to information and data even more user friendly.
Having ESG goals and considerations in a digital format makes it easier to measure success. Managing ESG issues during the ownership phase will reduce risks, costs, and liabilities, increase revenue and create long-term value when it comes time to sell.