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ESG moves up the real estate agenda

Although starting from a relatively low base, more investors now see ESG as a priority. Awareness on diversity issues has a long way to go, though.

A growing number of investors see environmental, social and governance as a central concern when deciding on investment opportunities, although they are not yet the majority. According to PERE’s Investor Perspectives 2021 Study, 38 percent of investors polled consider a manager’s ESG credentials a major part of their due diligence process, up from 31 percent in the 2020 study.

For more insights from the Investor Perspectives 2021 Study, click here. For more on how we compiled the study, click here.

“ESG may not be as high in the list as some of the other factors, but awareness is growing because it makes good economic sense,” says Edward Tran, partner at Katten Muchin Rosenman, a multinational law firm. “Investors looking to the long term and aiming for a good return need to have buildings that are consistent with sustainability principles.”

Beyond economic reasons, the urgency of climate change is a crucial factor driving ESG policies and compliance in the industry. “Given how the world is changing and being impacted by climate risk, you have to look at your carbon, energy and water footprints in your property portfolio to reduce them. It takes time, but you have to act now,” says Kiran Patel, deputy chief executive and global CIO at Savills Investment Management.

The Perspectives 2021 Study shows that over 40 percent of investors polled believe managers are taking the risks of climate change seriously enough in their own investment policies and practices, although more than 20 percent show some degree of disagreement with this notion. Still, a significant number – 37 percent – neither agree nor disagree, which could hint that investors need more data to understand managers’ commitment to ESG.

Interestingly, covid-19 seems to have accelerated demand for ESG data during 2020. According to GRESB, an industry-driven organization that assesses the sustainability performance of real estate portfolios, 1,229 property portfolios participated in its real estate benchmark last year, a 22 percent increase compared with 2019, which evidences the sector’s increasing commitment to transparency and disclosure.

Narrow focus on diversity

Investors see diversity as less of a priority when deciding on investments, though. Only 14 percent of those polled say evidence of a manager’s diversity and inclusion credentials represents a major part of their due diligence process, down from 23 percent in the 2020 study.

Furthermore, 87 percent have not refused an opportunity based on a lack of diversity at the manager level, compared with 73 percent in the previous year’s study.

Andrea Carpenter of Women Talk Real Estate recognizes that the industry is still in the early days of making real progress on matters of diversity and inclusion. “What’s important at this stage is that it’s part of the due diligence conversations between investors and managers,” Carpenter says. “Having investors ask about managers’ commitments in this area raises awareness and starts to make all those in the industry more accountable on the issue. In the future, for the managers that don’t sustain these efforts or make progress, I think that is when investors will start seeing it as more of a factor in their decision-making.”

Katten’s Tran expects diversity to become more important, particularly for the government pensions and large pensions with a public profile. “They will not be able to escape the scrutiny of the larger trends seen in many countries, which are really turning in favor of recognizing the importance of diversity across the industry.”