ESG Investor Survey: The diligent approach to investing responsibly

Real estate investors are undertaking detailed assessments of ESG credentials, with a strong focus on environmental sustainability.

Green credentials and governance are the priorities for investors when assessing managers and assets, while social factors are given lesser consideration.

The due diligence process is crucial to investors in private real estate, with the vast majority of investors considering both the corporate entity and the real estate holdings of a manager when evaluating ESG credentials, according to the ESG Investor Survey 2019. However, a surprising 14 percent of respondents say they do not carry out ESG due diligence.

When carrying out due diligence on a potential fund manager’s corporate entity, investors place the greatest importance on ESG disclosure, such as an annual sustainability report or voluntary ESG reporting to investors (cited by 93 percent of respondents). Meanwhile, 86 percent of respondents consider the manager’s commitment to ESG standards such as UN PRI or GRESB. Alan Dalgleish, chief executive of Asia-Pacific non-listed funds body ANREV, says: “We see GRESB getting a tremendous amount of buy-in from investors and an increasing insistence that managers are assessed. Investors doing due diligence are looking for quantifiables.”

External governance factors, such as fiduciary duty and adherence to bribery and corruption legislation, are considered by 79 percent of investors, while internal governance, such as employee remuneration and compensation, is highlighted by 72 percent of investors.

Investors carrying out due diligence on a potential fund manager’s real estate holdings place the greatest importance on energy and sustainability building certifications, factors cited by 90 percent of respondents. The efficiency of a portfolio in terms of energy, water and waste is the second highest ranked.

Meanwhile, 64 percent of respondents consider resilience and the ability to react to climate change, 62 percent consider building safety and materials and 60 percent consider regulatory metrics. While more economies are looking to move toward becoming net zero carbon emitters, only 48 percent of investors consider greenhouse gas emissions when carrying out due diligence of a potential fund manager’s portfolio.

Consideration of the socio-economic impact of assets came further down the list, cited by 38 percent of respondents.

Health and wellbeing in the portfolio is valued by 45 percent of institutions. Bill Schwab, principal at Real Estate Investments and formerly global head of real estate at Abu Dhabi Investment Authority, says: “This is something that people would not have been as concerned with 15 years ago. There has been a gradual ramp up of concern as the workforce has become more sensitive about the quality of their environment.”

A number of factors are considered of prime importance in carrying out due diligence of managers. Clear evidence of ESG policy implementation is considered very important by more than half the respondents, as is a clear ESG policy and approach, while only 31 percent of investors said it was important for managers to show improvement or ‘high marks’ in ESG reporting.

However, Mathieu Elshout, senior investment manager, private real estate at PGGM, says: “Even our best performing partners in the GRESB assessment agree more can still be done. Climate change is deemed the biggest risk to the global economy, according to the World Economic Forum. So we continue to address ESG issues with our partners, we benchmark within regions and push them to continue improving their results. We also bring together managers across regions, in order to exchange best practices.”

Mitigating risk
Meanwhile, 89 percent of investors feel a manager’s ability to mitigate risk is either somewhat important or very important. Schwab considers risk mitigation to be at the heart of ESG concerns for investors. “Institutions are the owners of assets for the long term, so need to address the opportunities and the risks over that time. So ESG is bound up with the concept of future proofing, of mitigating future risks. You want your building to be attractive in the future and to be able to pass whatever future regulations you might face.”

The two most common methods for sourcing ESG information about their managers are questionnaires, used by 78 percent of institutions, and site visits or face-to-face interviews, used by 52 percent. Meanwhile, 17 percent admit to struggling with finding reliable information on a manager’s ESG policies.

Despite most investors undertaking detailed due diligence on prospective managers, only 22 percent of institutions have a policy that prevents them from investing with managers that score below a certain required level. Those investors that do carry out this ‘negative screening’ cited reasons such as non-participation in GRESB or failing to be sign up to the UN PRI.

Globally, environmental issues are the most important component of ESG for investors, with 54 percent ranking them number one.

However, governance is considered the most important factor by 41 percent of investors globally. Social factors seem to be considered the least important, with only 16 percent of institutions considering these to be the most important factor. However, it is the second most important factor for nearly half the respondents.

Billy Grayson, executive director at the Urban Land Institute’s Centre for Sustainability and Economic Performance, says: “For most investors we talk to, the ‘G’ is by far the most important: issues like board and executive compensation, policies and programs to manage business ethics and avoid issues like insider trading and anti-competitive behavior.”