This article is sponsored by Invesco
In its journey to improve ESG performance, Invesco has set up “ambitious targets” aiming to help mitigate downside risk while anticipating changes in ESG regulations and reporting, says Maximilian Kufer, who recently joined the investment manager as head of ESG for private markets. To achieve these targets, Invesco is collaborating with its stakeholders, implementing industry frameworks and in-house proprietary tools to demonstrate they are not just “talking the talk but walking the walk.”
What do you think about ESG from a real estate perspective? And how has your ‘ESG journey’ changed over the last few years?
ESG is really an area where we can see some tangible results and an opportunity to have an impact on our assets through the decisions we make as real estate investment managers. It is critical to consider ESG in all aspects of our strategies to deliver returns for our clients, aiming to deliver on sustainable products and to contribute to a more sustainable built world. As active asset managers, we have the ability to make changes in the assets we’re managing, but also to raise team awareness internally. We really believe in empowering our investment managers to act on ESG. So, I believe ESG presents itself as a driver of change, both internally and externally.
Engagement is a key component of our strategy. ESG is constantly evolving. We have regulations that are in consultation and then they are implemented; sometimes they are delayed and there are changes in our investor requirements. So, it’s always important for us as a responsible investment manager to think those few steps ahead for our clients, aiming to deliver best-in-class ESG performance.
Over the past few years, our journey toward greater ESG integration has evolved from focusing on certifications and data collection to a place today where we have set short-, medium- and long-term targets to be held accountable for our objectives, which have become more ambitious over the last 12 months. Earlier this year, we published our first annual ESG+R report, where we set out our key milestones targeting net-zero carbon emissions by 2050, with intermediary goals for energy, water and waste by 2030, including annual reduction objectives. In addition to the environmental management goals of our ESG+R framework, we continue to actively pursue third-party independent certification for our assets, where, for example, we’ve already certified over 90 percent of assets under management (AUM) within our European real estate business.
Further, a critical component of our strategy is to consider climate resilience in relation to both physical and transitional risk throughout all stages of investment management. We’re at a point now where we’re taking a step forward on a journey that will continue to evolve as we engage with investors, partners and stakeholders.
Through this journey, have investors’ mindset toward ESG within private markets changed?
Yes, absolutely. Within the listed space, investor expectations around ESG are well established and understood. When it comes to private markets, there’s been a significant increase in awareness and expectations over the past few years. Several tools and benchmarks now exist to help to inform investors about ESG, as they have increasing expectations when it comes to responsible investment.
The overall understanding that there can be tangible results in real estate has led to greater investor interest in transparency and data to understand our performance. Questions from investors have shifted from ‘what is your ESG policy?’ to ‘what is your roadmap to net zero?’.
Increasingly, investors are looking to understand the real actions that we put into place with real assets. Investors have and will become more and more demanding of investment managers. So yes, there’s been a sharp change in their understanding and expectations of what we can do and deliver.
What are your ESG targets over the next 12 months?
Earlier this year, we set our global objectives; first and foremost, achieving net zero by 2050. We’re targeting a minimum 3 percent reduction in our carbon footprint per year based on our 2018 baseline. In addition, we target a minimum 1 percent reduction in water consumption and 1 percent increase in waste diversion annually.
We’ve taken a global strategy, but also finetuned it for each region to make sure we can implement it locally with local benchmarks and tools. For instance, in our European portfolio, our objective is to have over 90 percent of our standing AUM with an environmental certification, such as BREEAM-in-Use.
We have also introduced dedicated ESG training sessions for our staff and provide regular coaching on our ESG-related tools. Training is a big component of the success of our strategy as it’s important that our investment management teams take ownership of what we do.
How are you planning to deliver these targets?
We’ve reiterated internally and externally that climate change is our top priority. We’re taking a very pragmatic approach in the way we’re tackling this on our journey to net zero. For each of the objectives that we set, we’ve provided guidelines for our investment managers on how to take action and developed tools so they can monitor progress over time. We also ensure our teams have the right amount of support, via consultants, to provide technical expertise in delivering on ESG objectives. Most importantly, we utilize a data-management platform to monitor performance and progress.
But really, it’s about taking incremental steps toward these targets, which we can demonstrate to our investors. We already began earlier this year by carrying out net-zero assessments of our portfolios to identify the measures required to align with 1.5 degree pathways toward net zero, implementing short, medium- and long-term action plans, identifying the necessary capex requirements, identifying the potential to install on-site renewables, and ensuring energy is procured from renewable sources, where possible.
These initiatives, however, are not new to Invesco, as ESG has been at the forefront of our objectives for several years. For instance, after conducting an energy audit of a mixed-use asset in Barcelona, we took the first steps in optimizing operational performance and emissions by allocating capex to optimize performance. In an initial phase, we optimized the thermal performance of the building through the BMS system, upgraded lighting fixtures to install LED in common areas, and installed sensors throughout the property for accurate live data capture and monitoring. We also worked with our tenant to promote more sustainable operations and business behaviors by sharing best practice guidelines for their operation.
Through engagement with our property manager and tenant, and by deploying these actions, energy consumption was reduced by 29 percent and carbon emissions were reduced by 30 percent for the whole building, bringing us a few steps closer toward our goal of net-zero carbon emissions by 2050.
Are you finding ESG frameworks for the real estate industry useful today?
There are several frameworks and resources being developed by organizations and industry working groups to provide guidance on how to best implement ESG, how to align with net zero, how to meet regulatory changes – and that’s a very positive sign.
There’s a real drive in the industry to better understand and implement these frameworks as responsible investors. Invesco supports these initiatives as it’s ultimately a collective effort to deliver on these ambitions as an industry. By collaborating with our industry networks, and our investors and stakeholders, we can ensure there is alignment between goals and frameworks in the future.
As we see different ESG frameworks, tools and benchmarks arising, we’re also developing proprietary tools to better understand and consolidate the wealth of information that’s available to us.
For instance, we are developing an in-house tool that aggregates the asset-level data we’re collecting, climate risk information, as well as open-source data to provide a database accessible to Invesco’s investment management teams, easily identifying performance trends, KPIs and key risks to our global portfolio’s benchmark performance. Providing the right level of insight is fundamental as responsible investors.
Data is key to anything that we want to do and talk about regarding ESG. Providing greater access to data is essential to making informed decisions based on performance, to thinking strategically about the physical impact of climate change on assets, and how the impact of transitional risk from regulations will affect the way we make decisions in the future.
What are the main challenges today for investors looking to implement ESG goals within their portfolios?
As much as data can present opportunities, it also presents challenges. Making sure we have full visibility of building performance as a landlord and engaging with our tenants is crucial to implementing actions. Given the increase in the overall awareness and eagerness of our tenants on ESG issues, we continue to facilitate that collaboration with the support of our property managers.
Challenges also exist because many of these concepts around achieving net-zero targets are still evolving. Energy efficiency measures and optimization of operational performance can only take us so far; we’re likely to be dependent on technologies and solutions that are yet to be developed. So, there needs to be conviction in what we’re doing and acting now, based on what we know to be the best solutions at hand on our journey to a more sustainable built environment.
There’s certainly some skepticism about some tools or pathways, but if we continue to wait until all the tools and solutions are perfect, on having perfect data coverage, we will never get to net zero.
We need to be transparent about where we are in our journey in collecting data, and how we are performing, based on our best assumptions and knowledge today, and demonstrate these step changes to clients, which are increasingly placing higher expectations on us to deliver on ESG.
There are many challenges but, at the same time, several opportunities. I believe that acting as an early mover in this space can also create an opportunity to pave the way as industry leaders. We’re all in this journey together and we’re trying to share best practices on how we go about this in a responsible, pragmatic and meaningful way.