Sum up the sector’s progress to date?
Christy Hill: The level of awareness by all stakeholders has been elevated. The financial case for the ‘E’ component has been proven [and] now has broad global buy-in. The ‘S’ continues to evolve and broaden in real time. Many of the social metrics have been identified, but they’re more challenging to quantify. It’s imperative that [the] industry prioritizes collecting and analyzing that data to more clearly understand the impact of our social commitments.
Head of Americas asset management and global head of ESG
PGIM Real Estate
Co-founder and president
Stuart Fiertz: The sector has largely focused on the carbon footprint of each building. While this approach is expedient and reflective of the climate emergency, the sustainable impact of each building is multidimensional with important considerations left out by the current approach. Applying social value measurement techniques can help convert a full range of variables into a single number [that] represents a more powerful tool for fully assessing and comparing individual buildings and aggregate real estate portfolios.
Lili Dunn: ESG has grown from a niche interest to a major factor impacting investors’ allocation decisions and sponsors’ platform capabilities. As an apartment investor and manager that has focused on ESG for years, it’s a trend we’re happy to see.
Are investors demanding more action?
CH: Investors [are] asking more complex and probing questions, evidencing their own growth and education in the space. Transparency is paramount and investors want to have a deep understanding of how [managers] are thinking about ESG [and] how exactly we intend to execute.
SF: Under pressure from their stakeholders and tightening disclosure requirements, they are certainly becoming more demanding. Their primary concerns center around energy and resource efficiency of each building and of their aggregate portfolios. We are also getting more questions on procurement practices.
LD: We see an increasing investor focus on ESG, particularly on issues related to diversity and inclusion, environmental impacts and energy efficiency. Investors want to make sure their partners are not only generating attractive returns, but also doing business the right way.
Should ESG under performance be a deal breaker for investors?
CH: The existence of risk should not preclude investment if there’s an adequate strategy in place to mitigate said risk. This is fundamental to the concept of resilience. Further, poor performance today may become an opportunity for owners willing to take on the challenge of improving properties from an environmental, social and governance standpoint.
SF: Yes. We may well be heading for a tipping point here whereby asset values will attract a premium if they have solid ESG credentials. Poor ESG performance should raise a red flag against a manager and they run the real danger of bringing greater risk to portfolios in the medium term. In all likelihood, the manager [not] taking ESG seriously will fail to provide investors with the transparency needed to generate timely and accurate stakeholder reports.
LD: A manager’s approach to ESG says volumes about who they are as a company and their values. We see it as universally important and expect it to be the price of entry going forward.
Can real estate achieve net-zero carbon goals by 2050?
CH: Yes, but reaching that goal will impact the industry in different ways at different times. And at the asset level, certain sectors will face greater challenges than others based on a lack of operational control.
LD: We see this as an excellent long-term goal, and, with a concerted industry-wide focus, believe it could be achievable.
Looking ahead, what is real estate’s biggest ESG challenge?
CH: Fully understanding the impacts of climate change, which go way beyond the physical climate-related risks. Transition risks, such as mass migration, insurance premiums, taxes and regulations, are significant factors that drive market demand and operating expenses, and thus valuations. Also, quantifying the impact of our social initiatives will be critical, although challenging.
SF: Keeping housing affordable while striving to meet society’s full set of sustainable development goals. Even if we capture these ambitions right at the design phase, efforts to limit land use, achieve higher energy efficiency and reduce resource consumption will generally contribute to higher development costs, restricting both affordability and much-needed supply. Managers and investors need to think long term and more creatively to meet this challenge.
LD: Maintaining rigorous environmental standards may become more challenging for certain groups and strategies facing increased pressure on returns. And those companies not embracing diversity and inclusion will be challenged to attract and retain both talent and investors.