ESG Investor Survey: Shades of green and regional differences

Concern about environmental, social and governance issues is global, but practices and priorities vary around the world.

It would be a contrarian real estate investor or investment manager that said environmental, social and governance issues were not a priority, but adoption of measures to improve these factors varies across the world.

LaSalle Investment Management professionals agree that European investors have thus far led the way in pushing for implementation of ESG measures in real estate, while Australasia is also at the crest of the ESG wave. But Asia and the Americas are not far behind.

Sophie Carruth, head of sustainability, Europe at LaSalle, says: “European investors have really been at the forefront of ESG for quite a number of years and pushing the agenda. It has been interesting over the last few years to see how questions from investors have really evolved.

“Initially we would be asked, ‘Do you have an ESG policy?’ whereas only a few weeks ago I was asked, ‘Have you got a plan on net zero carbon and what is your target date?’ Now that is a very explicit and specific question. It is a very clear indicator of the direction of travel for investors.”

Eric Duchon, the firm’s global head of sustainability, agrees that European investors have historically been the most progressive on ESG issues, but Americas-based investors have caught up and are “getting more sophisticated.”

Asia lagged for some time, but is catching up with a vengeance, says Tom Miller, head of development for Asia-Pacific. “Four or five years ago, except in Australia, which has long been a leader on ESG, we would hear a lot of nice sounding platitudes but there were very few people actually moving ahead. Now, however, attitudes and actions have changed dramatically. In Singapore, Japan, China, South Korea and Hong Kong there has been a push from investors and from government, so managers have responded. In China, the consumer has also been a driver; buyers of high-end residential property demand attention is paid to ESG issues, so developers have to take note.”

Investors have been the prime drivers of ESG measures in real estate, with certain groups being particularly proactive. In Europe, investors from the Netherlands and Scandinavia have been particularly keen. “With the Netherlands I think it’s fairly easy to understand,” says Carruth. “It is a country very susceptible to the impact of climate change on sea levels.”

Stateside, Duchon says Canadian and US coastal pension plans have led the ESG agenda: “They are asking more detailed ESG questions in their due diligence and annual surveys that go beyond just policy and reporting; they are now asking us how ESG is being implemented at the fund and asset level.”

In fact, Duchon points out that in terms of implementation GRESB data shows North America as the regional leader with a score of 70 with Europe and Asia tied on 66. “From my perspective, the perception that Europe is the leader is a dated one as American REITs and funds have mobilized over the past five years to implement ESG on the ground at the fund and asset level.”

Meanwhile, in Asia-Pacific, the most demanding investors have been Australian and investors from outside the region, says Miller, often including the Dutch. So far, Asian investors have been less pushy about ESG issues, but this is expected to change.
In both Asia-Pacific and Europe, there is considerable variation between nations in the importance given to ESG measures. In Asia-Pacific, Australia and Singapore are still clear leaders, while both China and Japan have been making rapid improvement.

However, Miller notes that Hong Kong, despite being a mature market, is lagging somewhat. “Government policies tend to be more voluntary than not and while many developers talk about ESG issues and some are really committed, others are not and that is probably because there is no real market perception that attending to ESG matters will help their bottom line.”

In Europe, the investor and industry focus on ESG issues tends to decline from west to east and north to south, says Carruth, with nations in Eastern and Southern Europe less focused on such matters.

Emphasis on the ‘E’

Across the world, it is clear that the environmental element of ESG is the most crucial to investors. Miller says: “The environment side, especially energy use, is the real priority for most investors, managers and tenants as well. It is built into the DNA. This is partially because the improvements that ESG measures make are more likely to be quantifiable and applied to the bottom line. If you can reduce the energy per square foot required to run a building by 20 percent over the competition, you have a better building and you get a higher value.”

While Europe tends to the temperate, in some parts of the Asia and the Americas the energy used in cooling or heating a building – or both in some markets with varying seasonal climates – is substantial, so any savings add real value.

Carruth agrees: “Frankly, it’s easier for managers to respond on the ‘E’ than on the ‘S’ and the ‘G’, because that was just much more clearly defined and easier to communicate. In the UK, for example, for quite some time we’ve been reporting to our clients and investors on environmental performance, the energy, carbon, water and waste performance of the assets in their portfolio on a quarterly basis.”

Duchon agrees that at the asset level, investors place most emphasis on the ‘E’ because it is more quantifiable, but notes that in the Americas, the weighting on the E, S and G shifts if you are talking about investor selection of a manager: “Investors have long weighted governance heavier than environmental or social when it comes to manager selection because they want to hire one that is legally, ethically and financially responsible. But they have begun to place more importance on the ‘E’ and ‘S’.”

‘S’ on the rise

Social sustainability is becoming more and more important, says Carruth. “The social side of things has been a little bit slower to evolve, but the dialogue around the social aspect of ESG within real estate has evolved over the last couple of years.

“Community engagement is one example of this; we have a community engagement program across our shopping centers, where we help with fundraising for local charities and also work with a series of community groups to offer them space for events – like pop-up venues in a shopping center, which might also use a vacant unit.”

This initiative has been beneficial to communities and also increased dwell time in the malls, says Carruth.

Miller notes that social sustainability is becoming a bigger issue in Japan. However, in Asia more generally, the mixed-use nature of many major developments means they have to take account of the social fabric “for potential tenants, for purchasers, for the neighborhood, for the city,” he says. “And at the end of the day, those values enhance the asset value, and our investors are happy as well.”

Carruth adds: “We will soon see more assessments of the socio-economic impact of our assets. It is still pretty early days, but I think that is an area where it will become more normal for landlords to assess the socio-economic impact of their assets and try and quantify the benefit.”

Wellness is a relatively new area within the social sustainability umbrella and is a particular focus in Europe and the US. Carruth says: “More recently health and wellbeing has become a massive focus. I’d say we do more work on the office side of things and also on our residential portfolios. We are trialing building level certifications to demonstrate the health and wellbeing credentials of our assets.”

Quantifying the benefits of healthy buildings will be crucial to the real estate industry taking it forward and Miller says big data analysis will be key to that in future.

The governance aspect of private real estate is no less important, but tends to be more static. In this area, industry bodies were established in the US and Europe earlier than in Asia, with Australia again being an outlier in its region. However, the demands of international investors are the same in Tokyo or Toronto, so managers naturally meet these requirements. “We are not rapidly changing what we are doing on the governance side of things because we already have lots of very robust policies and processes in place,” says Carruth.

Looking to the future

New priorities in ESG are developing which vary somewhat around the world. In Europe, the phrase du jour is impact investment. Impact investing refers to investments made with the intention to generate a measurable, beneficial social or environmental impact alongside a financial return, to provide capital to meet social or environmental needs.

“Impact investing has been around for years and years, but it has gained momentum over the last two years,” says Carruth. “It is at an early stage for real estate, but managers are taking note because there is capital interested in impact investing.”

In Asia-Pacific, where a number of nations are already dealing with the fallout from climate change, the concept of resilience is becoming more and more important, says Miller. “Investors are increasingly focused on how climate change will impact their building over the next five to 50 years. And you need to think about this when you look to acquire an asset. How is it set up to handle potential changes in climate? Is the building going to take valuation hits, or be less desirable, if it’s flooding every second month, instead of every 20 years like it might have done before?

“No matter what the time frame that you’re investing in, resilience is an area that needs to really be considered. In a very practical way, I think the insurance industry, which up until now has based premiums on historic trends, will drive this, once it starts using climate modeling to set premiums.”