This article is sponsored by Invesco Real Estate
While understanding ESG performance in the private real estate sector certainly depends on measuring data around energy and emissions in an objective manner, tenant engagement is essential to deriving a big-picture view. This is true not only of environmental goals but also those relating to social and governance challenges.
Maximilian Kufer, head of ESG for private markets at Invesco, considers how technology is helping with the collection of ESG data, shifting regulations around the world, and the importance of engagement when formulating, assessing and achieving ESG goals.
ESG is growing in importance for investors. What are some of the key trends you are seeing in this area?
ESG is becoming an increasingly important issue across all industries globally. Investors around the world have a keen focus on making sure investments are transparent concerning their integration processes, views and aims.
We are starting to see some differences around the types of question that investors are raising. In the EU, for example, there seems to be a greater focus on regulations and disclosure while in the US, there is a strong focus on operations. So, we are seeing different trends depending on the region but, ultimately, in private real estate, there is one key element: environmental considerations remain constant across the globe.
Generally, investors are thinking about ways they can improve the performance of their buildings in terms of energy efficiency, water management, waste and the associated certifications.
We can certainly see that net zero is a substantial area of interest. Increasingly, investors are looking for concrete examples that demonstrate ESG progress. The “S” and “G” factors are still emerging, somewhat, and are more difficult to quantify than environmental metrics. A lot of what we see from the real estate sector is angled at environmental issues from a disclosure perspective.
How can investors ensure resilience within their portfolio – mitigating both transitional and physical risk?
When we think about ESG, our focus is actually “ESG+R” where the “R” signifies resilience. Breaking it down, resilience contains two components: the transitional factor, which represents the risks or opportunities associated with the transition to a low-carbon economy; and the regulatory change and disclosure requirements. Alongside our investment management teams and external partners, we ensure that assessments of regulatory changes and performance expectations are part of any investment decisions.
There are also physical risks that have to be considered. Recently, we have seen an increasing occurrence of physical risk stresses from a greater number of extreme events, whether it is flooding or heatwaves. When looking at the location of an asset, the potential impacts need to be assessed alongside ways to mitigate these risks at the earliest stage.
To make sure we are considering resilience, it is essential that we have access to the right data and have a broader overview of these potential risks and opportunities – in terms of investment decisions, fund management and
asset-level strategies. We aim to drive ESG investment at the asset level while considering resilience at all times.
How is ESG regulation evolving and how is this impacting investor decisions?
In terms of regulations, whether they are emerging from Europe, Asia or the US, or anywhere across the globe for that matter, the starting comment point seems to be an objective of leveling the playing field in terms of how market participants are speaking about ESG and disclosing their processes. This can be hugely helpful in providing investors with consistency and reliability in terms of ESG data and reporting standards.
We are also likely to see more emphasis on performance-driven regulations over time. In France, for example, there are regulations mandating energy reductions by 2030, 2040 and 2050.
Even in the US, there are state-by-state differences when it comes to disclosure, even laws taxing buildings based on energy performance and carbon emissions. We see a shift going from disclosure-based to performance-based regulations.
How is the collection of data being employed to inform responsible investing?
Data is king. It is the bedrock of everything we do. Even as new trends emerge, we depend on having good, reliable data. We work with a data platform and partners to consolidate information to facilitate our reporting and provide our teams with visibility. It gives them access to broader insights and a wider range of data points.
Private markets rely on engagement with assets. While some may deem that as a challenge, I see it as an opportunity due to the hands-on nature of what we do. We have to collect information and investigate at the asset level. Providing teams with greater insights into data at the building level means we can identify potential inefficiencies or quick wins.
Things start to get really interesting when we explore how technology is being employed for ESG investment. The use of technology in buildings can really help us understand how an asset is performing from an operational perspective. With the systems in place currently, there is a range of options for data collection, from manual collection to more tech-focused solutions, such as smart sensors.
More recently, we have started to deploy network systems giving us real-time sensor data. This can be plugged into live operations from an energy perspective, giving our investment managers insight into peaks of consumption and inefficiencies. It becomes an in-depth management tool to help with efficient building operations.
Can it be difficult to know what data to collect?
When investing on behalf of clients with a range of objectives and priorities, we need to ensure we have a strategy to meet those requirements and demonstrate our performance driven approach. For this, we need both quantitative and qualitative data that is as granular as possible. Energy labels and certifications become management tools and point us toward hundreds of relevant data points.
Of course, there are various asset classes to consider. If you are looking at equities, for example, some of the social metrics may focus on things like diversity or gender pay-gap. These metrics do not always translate directly for real estate. So how do we acquire this data? We need to think more creatively about how we quantify social metrics in a way that is consistent.
For social factors, we look at tenant engagement and tenant satisfaction surveys. Of course, having a uniform approach to this does tend to be more difficult but we ensure we gather what we can. Ultimately, if we address the challenge of tenant engagement by collaborating with them to gather information, we can gain broader insights looking into the entire picture around building performance.
In terms of other challenges concerning ESG data collection, the governance element can be difficult. But there are high-level indicators we cover across our portfolios, such as exposure to green leases and ensuring investment teams follow internal ESG guidelines and checklists.
Considering ESG requests, we have seen a trend of investors shifting from focusing purely on investment portfolios toward individual organizations. So, we aim to provide a suite of tools when it comes to analysis at a portfolio level.
And then it is not just about portfolios, but it is also the interest in how we operate as a group. How do you support social efforts as a firm around things like diversity, inclusion and equality? This is only going to increase in importance.
How important is a balance between returns and impact when exploring ESG integration?
Driven by performance, it is important to be pragmatic when making investment decisions. If we take the example of deploying energy audits at the asset level, our teams first identify what measures make the most sense to implement, based on which will have the greatest possible improvement of environmental performance while also providing an attractive return on investment.
Also, if we look at the big picture in terms of transitional and physical risks, we want to emphasize that we are focusing on performance at the asset level. We want to ensure that we maintain asset performance, mitigate risk and, with impending regulations in some geographies, avoid potential penalties. We need to maintain balance at all times between returns and environmental performance.
Looking ahead, I believe technology will only help with achieving this balance. Innovative solutions such as digital twins should provide more insights to optimize assets, revolutionizing how we think about long-term impacts.
If we look at net-zero carbon goals, how can we make sure that assets will continue performing well in terms of environmental performance? We need to have the right models and solutions in place, at times looking to the future and relying on technology that does not even exist yet.
We keep a keen eye on emerging solutions that can help with asset management to drive performance. The number of solutions and vendors will only increase, so it is set to be an exciting environment over the next five to 10 years.
Case study: Plac Unii
In late 2014, Invesco Real Estate purchased Plac Unii, a 57,000 square meter (613,500 square feet) mixed-use property in Warsaw, Poland, for €226 million.
In the years since, the building has posted several notable ESG achievements around energy reduction, EPC improvement and sustainable refurbishment.
Optimization of lighting schedules and LED usage has been actioned throughout the building, green clauses have been introduced within lease agreements and 96.5 percent of waste has been recycled, with 2.8 percent being used as a source of energy. The selection of local, low-carbon materials has helped to reduce associated emissions. Compared with a 2019 baseline, the building has achieved over 30 percent reduction in energy consumption and an overall 40 percent improvement of the EPC rating.
Alongside the building’s environmental credentials, socially responsible initiatives, including community engagement schemes and local charity initiatives, have also been enacted. Engagement with office workers has been successfully employed through the promotion of an eco-friendly and healthy lifestyle.