This article was sponsored by Hermes Investment Management. It appeared in the Sustainable Investing supplement alongside the October 2019 issue of PERE magazine.
Responsible property investment (RPI) principles were first integrated into our firm in 2008 and since then we have progressed beyond considering simply ESG risks in the portfolio to looking at how we as an investment manager can proactively generate positive sustainable outcomes for all stakeholders, including investors, occupiers, communities and regional economies. These outcomes have been delivered through a proprietary, innovative and proven approach – the impact framework – to quantifying the relationships between property developments in the portfolio, the natural environment, economic growth, productivity and strong financial performance – what we view as the ‘holistic’ returns from investments.
The impact framework was designed to increase the intentionality, additionality and transparency of our approach to sustainable investment. At the core of this is our work investing on behalf of pension funds whose underlying investors depend on strong financial returns to fund their post-retirement incomes. The framework aims to deliver for investors both high and sustainable financial returns, as well as produce a measurable impact that is aligned with clear social, economic, fiscal and environmental goals.
Since 2018, three major impact themes have been targeted through our £7.3 billion ($9 billion; €8.2 billion) portfolio – urban regeneration, climate and resource efficiency, and the health and well-being of occupiers and surrounding communities. And looking ahead, in 2020 three new areas of thematic impact will be evaluated – jobs and skills development, affordable and accessible housing, and tenant engagement.
The process of translating this impact blueprint into constructive action for each of the investment strategies in the Hermes real estate universe involved mapping the specific characteristics of each fund or investment mandate against the impactful investment themes mentioned above.
A screening process identifies the appropriate overarching socioeconomic and environmental impact targets for the entire portfolio. After ensuring the impact framework is on sound footing, specific, measurable targets can then be assigned to each fund or mandate, according to their respective investment strategies.
Importantly, the impact of properties are then tracked against quantifiable criteria, not vague guidelines. Over 2018, we matched or outperformed on 80 percent of our key performance indicators. Not only do we benchmark ourselves against peers using globally recognized external measures such as the Principles for Responsible Investment and the Global Real Estate Sustainability Benchmark, but we also started last year to develop an internal benchmarking process – more on that later – in order to increase the intentionality of our impacts.
The role of meaningful placemaking
Of course, KPIs and industry rankings only tell part of the story. The most important results are measured through the experiences of the communities and families that work, live in and use properties in the portfolio, or what we have termed ‘placemaking’ – the act of creating urban spaces that generate robust, long-term investment returns while serving social, economic, leisure, well-being and community needs, rather than just a developer’s short-term profit target.
Over the last six years, our firm has undertaken eight large urban regeneration developments across the UK, spanning a combined 19 million square feet and £13 billion of capital value. The sites provide the perfect opportunity to showcase the meaningful placemaking concept in action. At a site level, this placemaking approach can often deliver results greater than the sum of its parts, with many additional benefits including:
- Restoring a sense of civic pride and belonging, often in regions of the UK that may have historically suffered from underinvestment, thereby bringing the ‘meaningful city’ concept to life.
- Creating mixed-use and multi-occupier sites that offer job opportunities and training across the employment spectrum, which increases the pool of technical and vocational skills in specific industries identified by the local authorities and regional enterprise partnerships we work with. The growing cluster of high-skilled workers typically attracts further capital investment and talent to the area, spreading waves of socioeconomic growth across the region, or a ‘halo’ effect of catalytic development. But these sites also provide entry-level employment to ensure that the places developed remain inclusive and diverse.
- Introducing mixed-use and accessible urban spaces that function as a community and cultural ‘mosaic’. In addition to creating employment opportunities and environmentally future-fit engineering, it is critical to respect the heritage of the sites being developed. In shared spaces, the aim is to conserve the local area’s link with the region’s history and ensure it exists in harmony alongside modern educational, commercial, technological, residential and well-being structures.
Building on our social impact measurement, we have piloted a benchmarking study that aims to throw further light on how the placemaking process brings positive change at different development phases – including design, construction and occupation – at both individual fund and site levels.
This benchmark was road-tested using the sustainable outcomes measured in the reports for three flagship RPI developments: King’s Cross in London, NOMA in Manchester and Wellington Place in Leeds. These sites differ significantly in terms of size and overall spend, and they also represent diverse socioeconomic regions of the UK with a wide variance of market prices, rents, risk premia and environmental challenges.
From that perspective, it is possible to more accurately measure where the highest impact intensity has been achieved across the targeted social and economic factors. And importantly, such research also offers insight into our additionality as an investor in a particular community.
The pilot benchmarking study has already delivered some surprising results, including the unexpected finding that wage rates at the NOMA site in Manchester are higher than those at King’s Cross in London. NOMA employees actually earn a staggering 45 percent more than the average worker in Greater Manchester.
The benchmarking report also revealed some interesting data on the various events held across the three sites in the pilot study. Again, after controlling for size and spend, it was found that one of the sites featured irregular but highly attended events, while another hosted frequent events but had fewer overall attendees. We found that the stark contrast in community engagement styles between the two sites reflected both cultural differences and the relative development stages of the two projects. Understanding these subtleties has enabled projects to be better tailored to local needs.
Benchmarking impact performance in a consistent manner provides a more nuanced view of the day-to-day ‘lived experience’ of the sites we develop.
Consequently, a better understanding can be gained of how impactful intent actually affects the people who live in, work at and visit real estate.
Performance is not compromised
These positive results do not come at the expense of traditional financial returns. In fact, they have enhanced performance, as shown by the sale of several of our best-performing properties in 2018. The strong valuations of those buildings also partly reflect energy-efficiency enhancements and community engagement that has been achieved.
The addition of quantitative social targets to the long-established environmental metrics in a property portfolio management toolkit can reinforce the power of placemaking. At its core, this shift is driven by the desire for places of work and pleasure that reflect the values of those that work and reside within them: flexibility, sustainability and purpose.
Profit and impact can co-exist in real-estate investing. Indeed, we now see them as two sides of the same coin.
Case study – Wellington Place, Leeds, England
The business and social hub shows how impact investing generates value to the wider community
300 – Leeds residents employed during construction
65% – Share of Grade A space delivered in Central Leeds since 2009 that is at Wellington Place
£1.7m – Total well-being benefits per annum enabled by events and activities. Around £2,000 was raised for charity at onsite events and activities
4,827 – Number of employees in Wellington Place. Ninety percent of occupiers have expanded their business and 60 percent of jobs have been taken by Leeds residents
1,000 – Tonnes of CO2 savings due to energy efficiency of buildings. Seventy-five percent of staff use sustainable transport modes to travel to work (compared with 70 percent in Central Leeds)
Case study – NOMA, Manchester, England
The £800m project is one of Hermes’ most high-profile developments
£150m – Spend so far. Sixty-two percent of workers were employed from the local area. More than 1,000 of them received on on-the-job training
~5,500 – Employees working across the NOMA area with £210 million generated in wages per annum. More than £4 million business rates revenue has been generated from occupied premises
£7m – ERDF funding granted for public realm and infrastructure improvements, including a new city center public square
20,000 – Number of visitors attending events over last three years, helping to generate over £4.5 million in social value through volunteering, training, apprenticeships, health