Invesco Real Estate on why it’s time for a holistic approach to ESG

Michael Kirby, Etienne Dupuy and Sze Ann Ong, tell PERE why sustainable investing is moving beyond box-ticking and rankings

ESG is increasingly being integrated into real estate investment decisions. Given the enormous contribution that buildings can make to both augmenting and tackling climate change, a genuinely holistic and authentic approach is needed, one that champions the importance of wide-ranging engagement and recognizes that outcomes are as important as outputs.

The environmental direction

Etienne Dupuy

Buildings play a huge role in shaping our climate. According to the United Nations Environment Programme (UNEP), they represent the single largest source of greenhouse gas (GHG) emissions. They use around 60 percent of all the world’s electricity, 40 percent of energy, 40 percent of resources and 25 percent of water. The places we live and work are critical to the long-term future of our planet. Institutional investors have supported the much-needed transition from brown to green buildings and the UNEP has commented that managers of global real estate assets “are one of the most important decision-making groups on Earth.”

Outputs vs outcomes

Real estate’s ever-growing environmental relevance is summarized in numerous sustainability metrics, benchmarks and certifications. Such measurement and monitoring have helped foster strategies that reflect a building’s complete lifecycle, with many investments considering environmental concerns during every phase from acquisition, construction/development, ongoing management/operations and disposal in a bid to generate benefits throughout the process. The significance of these assessment instruments and tools is unquestionable, yet it is vital to note that environmental impact is not the sole criterion for identifying a sustainable building.

Michael Kirby

From an investment perspective, we might define a property with reference to broadly overarching fiduciary objectives; it should seek to lower costs, improve financial performance, achieve competitive advantage and contribute to a better world. GRESB rates ESG performance of real estate funds and portfolios managing $3.7 trillion in assets worldwide, evaluating factors including resilience or environmental challenges, health and wellbeing of tenants and occupiers, and the levels of stakeholder engagement achieved by investment managers. This holistic approach goes to the heart of the need for authenticity in ESG investing.

For investment managers it is important to establish precisely what these instruments, tools and initiatives offer in terms of genuine insight. We believe they should foster proactive engagement on material ESG issues in which dialogue, transparency and the potential for change can be considered. For example, to purchase a property that scores well on a number of environmental measures, as opposed to one that falls somewhat short of a required or recommended standard, success or failure has been determined entirely by headline environmental data, which can happen if outputs are prized over outcomes.

ESG integration has the power to effect change over the long term and it is impossible to effect such change if properties are dismissed out of hand purely on the strength of output-metrics that might be subjective in nature. But even the most environmentally friendly buildings may have only limited impact if those who inhabit them do not share in or even comprehend the benefits.

Investment managers and authentic ESG integration

Investment managers have started to spearhead a practical shift toward sustainability. Transparency, accountability and pride of ownership are today on the rise and to ensure good governance they first need information. They need to know all sustainability related risks and opportunities that are genuinely relevant to the asset’s prospects and performance. Although initiatives, instruments and tools might assist them enormously, data should lead to dialogue and inform decisions rather than seal them. Relying exclusively on data can condemn investment management to the realms of questionnaires, which is all about box-ticking.

The more real estate investment decisions are shaped not just by data but by stakeholder engagement and a forward-thinking mindset, the closer we get to good governance. In tandem more investment managers will assume a level of responsibility consonant with their fiduciary duty. We often hear that data is ‘actionable’ but action demands interaction that we believe marks out ‘authentic’ investment managers whose approach to real estate is underpinned both by a desire to bring about positive change and by an obligation to protect and grow investors’ wealth.

Power of active ownership: Engaging with tenants and occupiers

To support long-term strategies, interaction between investment managers and stakeholders should influence more than the initial decision to invest in real estate assets. It should also influence the day-to-day management. Active ownership is now recognized as pivotal to unlocking long-term value through responsible investing. Investors are uniquely placed to maintain and enhance the ESG credentials of the assets in which they invest.

Sze Ann Ong

Studies show that when investment managers take the lead in seeking to review or improve practices, they tend to get results: for example, from insisting on green clauses in lease contracts to acting on the wealth of actionable data now available from assessment tools. It can also be achieved through engagement and interaction with the people who live and work in the properties, and the broader communities in which the properties exist. The choices that tenants and occupiers make can contribute massively to an asset’s long-term performance, which is why active ownership could extend to ESG education and buy in.

Authenticity in real estate investing is a multi-layered concept as opposed to just simply metric-driven responses. It requires a holistic, forward-looking, proactive approach; it draws on data but acknowledges the advantages of dialogue; it is geared toward transparency, accountability and pride of ownership; it aims to meet the needs of multiple stakeholders and crucially it is led by investment managers that utilize the power of active ownership.

Sustainability has also become part of the agenda for our pan-European hotel portfolio, by following a top-down and bottom-up sustainable strategy and tracking of industry benchmarks. We pursue nationally recognized sustainable building ratings, adopt physically responsible green building practices and reviews, and implement initiatives applicable to each property. It’s also a consideration within our investment process and is already a part of our due diligence process.

It is vital that ESG does not become a box-ticking exercise. It is not enough merely to be seen as green and accumulate actionable data and then decide to take meaningful action. It needs a holistic view, underpinned by the willingness to act and a capacity to effect positive change. This is where investment managers, a determination to engage and the power of active ownership can make an enormous difference. 

Case study:
The value of tenant engagement

An authentic approach to ESG requires engagement with tenants and occupants, since how they use a building space goes a long way towards determining its performance. Engagement can take many forms and it is essential to educate them on, for example, how a property makes use of green technology. In Warsaw, Poland, our office asset Plac Unii engages with tenants through its tenant satisfaction survey, thus actively listening to the needs of its occupiers. The result is that a successful tenant wellbeing and educational program has been put in place.

Case study:
Hotel sustainability in action

Earlier this year, Invesco Real Estate acquired the QO Hotel in Amsterdam, part of the Intercontinental Hotels and Resorts stable, on behalf of a client mandate. The hotel is part of a new breed of properties that are being built with sustainability in mind: 80 percent of the 288-room property’s lighting is sourced from natural daylight and it includes sustainable materials for all construction and day-to-day operations, such as a green roof, energy and water efficiency, and lower waste and carbon emissions.


This article was sponsored by Invesco Real Estate. It appeared in the Sustainable Investing special supplement that accompanied the October issue of PERE magazine.