ESG Investor Survey: Quantifying good intentions

Institutions believe ESG measures are at least neutral for returns, but there is a clear need for more quantifiable and comparable performance data.

Investors looking to quantify the effects of environmental, social and governance measures in their portfolios are facing an uphill struggle.

The ESG Investor Survey 2019 reveals that just over half of investors measure the correlation between the strength of a fund manager’s ESG policy and the investment return they are seeing. However, of the investors that do measure this correlation, 38 percent find it to be somewhat or extremely difficult. A mere 6 percent of investors say measuring this correlation is easy.

Over half of investors say they believe investments with strong ESG credentials perform broadly in line with investments that lack those credentials and 27 percent reckon strong ESG performance is linked to investment performance. However, more than a quarter of respondents are unsure if these measures have any positive effect. US investors are notably less certain about the effect of ESG measures, with many expressing uncertainty in this regard.

Constantin Sorlescu, INREV director of professional standards, says: “To shift the dial from a broadly neutral view of the benefits of ESG to something that clearly identifies advantage, the industry needs to focus on linking asset-level sustainability performance to performance at a vehicle level and vice versa – in other words, adopt a bottom-up and top-down approach.

“It also needs to ensure better access to performance data and the ability to quantify sustainability actions using consistent metrics and methodologies. Essentially, the task boils down to creating a robust, standardized system of measurement.”

Environmental focus

Of the three components to ESG, investors believe environmental factors are the most likely to influence investment returns, which is likely driven by these factors being easier to measure.

Bill Schwab, principal at Real Estate Investments and formerly global head of real estate at Abu Dhabi Investment Authority, says: “If you take energy efficiency measures, for example, you can calculate the return you get on your capital investment from the subsequent reduction in energy costs.”

Sorlescu predicts that social factors – such as health and well-being – will become increasingly important in asset performance. “Ensuring building occupiers are happy and fit is clearly good for individuals, but there’s also a direct link to improved productivity. Productive workforces mean healthy businesses, and healthy businesses generate long-term income for real estate asset owners and investors.

“That is why many of our members have started incorporating health and well-being into both their real estate investment, and their own business, strategies. We believe that the social element of ESG will only gain in significance as the industry works out how to deliver not just returns, but also purposeful societal dividends. The industry will do this because it’s the right thing to do, but also because it makes good business sense.”

Overall, investors are optimistic that ESG policy implementation is good value, with 43 percent concurring, while 12 percent believe the value is on par with the cost of implementation. Only 6 percent of investors consider the cost of implementation to outweigh the value. This shows that 39 percent of investors do not know whether the measures undertaken by their managers offer good value.

Only 40 percent of investors require ESG reporting from their investment managers, whether via an industry standard reporting system or a questionnaire provided by the investor. Another 40 percent of respondents who do not require this reporting foresee it becoming a requirement in the near future.

Sorlescu says: “Investors are increasingly asking managers to formally report on ESG and organizations focused on sustainability performance evaluation such as GRESB have helped the industry become more transparent in the ESG arena.

“For INREV, sustainability reporting is an important part of our reporting standards framework. Managers are required to disclose their ESG strategy, objectives and activity annually, as a minimum. Given the present overall environment, it seems inevitable that annual reporting will become the norm.”

Formalizing reporting

There is a growing range of ESG reporting systems for real estate, with the most popular being the UN Principles for Responsible Investing (40 percent of respondents are a member), the INREV/ANREV Sustainability Reporting Guidelines (19 percent) and the Global Real Estate Sustainability Benchmark (14 percent). Investors that are not members tend to be aware of these systems.

Billy Grayson, executive director at the Urban Land Institute’s Centre for Sustainability and Economic Performance, says: “Currently GRESB has the most traction but there is a lot of interest in the TCFD (Taskforce on Climate-Related Financial Disclosures) in real estate – many think that this standard will only become more important in coming years.”

Mathieu Elshout, senior investment manager, private real estate at PGGM, says: “The great thing about GRESB is that performance is benchmarked against a relevant peer group, which enables us to compare offices with offices, and retail with retail.”

There has been a considerable proliferation of reporting systems and certification systems in real estate, but Derk Welling, senior responsible investment and governance specialist at APG, cautions against this. “We are not in favor of having a separate certificate for each single issue, such as wellness or energy performance,” he says. “Future proof ESG rating schemes should cover all these issues. We will put more emphasis on a limited number of holistic building certifications, which should include long-term climate risk metrics.”