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ESG and diversity not yet center stage for investors

Although both issues are increasingly industry talking points, they are a priority for only a few investors, according to PERE’s Perspectives 2020 Survey.

The recent Australian bush fires are a reminder, if one were needed, of the impact of the climate crisis and on the urgency for the real estate sector to push forward with meeting net-zero carbon targets and resiliency initiatives. Nor can the sector avoid coming under the microscope on diversity. So, it is not surprising that it feels as if every private fund manager is eager to boast of these issues being part of its DNA. But PERE’s Investor Perspectives 2020 Survey reveals that a minority of institutions consider environmental, social and governance issues or diversity as central concerns when deciding on investment opportunities.

For more insights from the Investors Perspectives 2020 survey, click here. For more on how we compiled the survey, click here.

Just 31 percent of investors polled say an analysis of a manager’s ESG credentials represents a major part of their due diligence process. Half say it forms only a minor part of the process, while 19 percent do not include any examination of ESG practices at all. Part of the problem may be that it can still be challenging to measure ESG outcomes and correlate them to actual investment returns. And it can be particularly hard to quantify any increase in an asset’s value from health and wellbeing initiatives, which have taken something of a starring role in the conversation of late.

“I don’t think it is entirely correct to argue that lack of measurability restricts ESG due diligence,” says Kiran Patel, chief investment officer at Savills Investment Management. “There are more third-party providers of benchmarking services than ever before. What is more difficult is finding consistency and comparability with pricing impact.”

Patel is optimistic the issue is here to stay. “ESG considerations are only going to become more important, with both top-down pressure and bottom-up factors such as energy efficiency. I wouldn’t say this is a priority for all investors, but it is increasingly important for many.”

Diversity dilemma

Diversity forms a major part of due diligence for only 23 percent of investors. Further, 73 percent have not refused an opportunity based on a lack of diversity at the manager level and 54 percent are not actively engaging managers to promote these issues. But this too is an issue unlikely to go be going away any time soon. “It will not disappear,” says Andrea Carpenter of Women Talk Real Estate. “It is being taken seriously by industry leaders who know that while there is still much work to be done, a responsible and successful business is not possible without it.”

“Diversity matters a lot,” says Patel. “We are asking our recruiters to work toward presenting us with more female candidates so we can improve diversity and still pick the best person for the job. We don’t want quotas. But these processes take time.”