ESG integration best practice
Real estate investors have a long history of responsible investing largely due to the relative homogeneity of the underlying assets – buildings. Unlike more diversified asset classes, real estate has benefited from the development of sustainability certifications and comparable data sets. For example, BREEAM, one of the largest providers of green building certifications in the world, was established in 1990. The long-term nature of most real estate investments has also increased the focus on ESG factors. Longer investment horizons may lead to an increased risk (or opportunity) of financially material ESG factors arising.
The path to net zero carbon by 2050 runs through the heart of the global real estate industry.
And yet, as with returns on investment, the responsible investing approaches of the past are not always a reliable guide to future performance in this area. Real estate investors like us cannot afford to rest on our laurels; our approach to responsible investing must continuously evolve in order to stay ahead of the curve, continuing to manage ESG risks, but also paying increasing attention to the sustainability outcomes that real estate investing can influence .
Let’s start with climate change. About 40% of global carbon emissions come from real estate, either through the operational use of buildings or through intrinsic emissions from building materials, such as cement and steel. As such, the path to net zero carbon by 2050 runs through the heart of the global real estate industry. Our organizations recognize this and have each made net zero commitments: by 2035 in the case of Link REIT and by 2050 for BentallGreenOak.
What steps are we taking to meet these commitments?
At Link REIT, our approach is integrated both at the company level and throughout our investment value chain. For example, we have net zero governance structures in place that guide our investment and procurement processes. We also work closely with our issuing companies and tenants to increase operational efficiency, whether through education or identifying and implementing new technologies. BentallGreenOak manages climate risk through our due diligence process, proprietary sustainability data management system, climate adaptation tool and strong stakeholder engagements. As part of our net zero goal, we are analyzing decarbonization pathways focused on efficiency, electrification and renewables for specific funds.
We have also seen how the whole industry is rising to the challenge. Investor groups and related frameworks, such as the Net Zero Asset Managers Initiative and the Institutional Investors Group’s Net Zero Investment Framework on Climate Change, provide real estate investors with clear direction for setting net zero goals. significant. Several national chapters of the World Green Building Council have developed or are in the process of developing net-zero building certifications, while the Carbon Risk Real Estate Monitor tool provides decarbonization targets and pathways (in terms of gas intensity to greenhouse effect) for different types of properties and each country for the global warming targets of 1.5°C and 2°C.
Focus on the S
There is much more to discover when it comes to climate and broader environmental performance – the impact of real estate on biodiversity, the resilience of buildings to physical climate hazards, the development and use of materials and more sustainable building techniques, among others – but we also see the real estate industry doing more to measure the social impact of individual investments and/or entire strategies. Moreover, institutional investors show that generating positive social impact does not have to come at the expense of financial returns.
The Covid-19 pandemic has further changed the way real estate investors view social factors such as tenant health and well-being, given the fundamental shifts many societies have experienced in terms of the use of residential space. , office and retail. At BentallGreenOak, we are increasingly focusing on creating spaces that encourage movement and collaboration, balancing aesthetics with healthy working and living environments, and engaging directly with our tenants to generate mutually beneficial relationships.
Most real estate sustainability certifications tend to focus on environmental aspects at the expense of social factors.
We are also encouraged to see how new certifications such as Fitwel and WELL are being used more widely to guide the development of buildings that emphasize human health and safety. Most real estate sustainability certifications tend to focus on environmental aspects at the expense of social factors. However, as with investors in other asset classes, we see the need for more meaningful social metrics to better understand and track performance in this regard.
To begin to fill this gap, BentallGreenOak has developed a Social Impact Assessment, a data-driven tool that assesses the social sustainability of our commercial real estate assets. It provides an in-depth assessment and relative score for each asset’s social sustainability performance in community health and wellbeing, community development, and sustainable spaces. With the growing demand for social indicators, we are constantly improving our data pipeline and analytical tools.
The next frontier
As we strive to do more with existing resources and tools, much of our progress on the environmental and social factors described above will come down to the identification and adoption of new technologies, whether whether in favor of better data management, the continuous improvement of the tenant experience, or the desire for more efficient and sustainable construction techniques. At Link REIT, examples include artificial intelligence for predictive energy management and distributed ledger technologies as immutable records of performance and productivity. These solutions help extract, organize, analyze and verify ESG information from a range of data sources, strengthening regulatory compliance and improving investors’ ability to make informed decisions.
Similarly, at BentallGreenOak, we have created a Sustainable Innovation Lab, which has supported property-level innovations, such as our Climate Resilience Tool, which won the 2020 Canadian Green Building Pioneer Award. The lab also funds further research on sustainable real estate investing.
But these innovations and the use of technology should not overshadow the fundamentals of responsible investment in real estate either. These include:
- good governance
- in-depth consideration of ESG factors during due diligence
- identification of areas for improvement and continuous monitoring during the holding period
- collaboration along the real estate value chain
- informed tenant and broader stakeholder engagement
Having these elements in place means a solid foundation for our efforts to achieve the difficult but necessary goals that we and our customers have set for ourselves.
To learn more about responsible investing best practices for real estate investors, read the recently updated PRI Introduction to Responsible Investing in Real Estate.
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