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Lazards’ Jacobs: Investors increasingly prioritize ESG

In tandem with improving regulation, institutional appetite for assets demonstrating strong ESG credentials is growing, says James Jacobs, head of real estate for Lazard’s private capital advisory group.

Jacobs: An increasingly frequent topic of conversation with investors pertains to the social ‘S’ and corporate governance ‘G’ components of the environmental, social and governance equation.

April saw a general increase in investor appetite for real estate. This reversed the March result, in which more investors pressed pause. In addition to the increased general appetite, investors were also more focused on ESG issues.

There continues to be interest from institutions to gain exposure to real estate in two distinct ways. First, there are those looking at the market through a distressed lens. They are focused on opportunistic equity, distressed real estate credit and sectors clearly dislocated – parts of the hospitality industry, for example. On the other hand, there is a distinct group of investors continuing to seek to deploy capital in a more cautious, conservative manner. They are focusing on the resilience of income, sustainability of cashflows and underlying asset quality.

However, irrespective of an institution’s strategy, an increasingly frequent topic of conversation with investors pertains to the social ‘S’ and corporate governance ‘G’ components of the environmental, social and governance equation.
Historically, the environmental component of ESG has received the greatest attention because it is easier to quantify by managers, which can measure impact by quoting CO2 reductions, developing LEED certified buildings and other metrics associated with sustainability. However, investors are beginning to require more substance when performing due diligence on all three components of ESG, even if it is more difficult for an investment manager to quantify the impact of social and corporate governance on
investment strategy.

Investor focus also seems to extend beyond the fund’s strategy, with attention being paid to how the manager runs its business, for instance assessing how diverse the employee base is. In the same way customers of businesses are starting to push for change by exerting pressure through their buying power, investors and consultants can influence managers by voting with their capital commitments. As a result, ESG is something managers will need to spend more time thinking about.

Many investors will be signatories of the United Nations Principles for Responsible Investment and will likely have their own ESG policy. Following the Sustainable Finance Disclosure Regulation coming into force in Europe in March, we are expecting to see an even greater focus on ESG over the coming months in that region.

However, there is still no standard definition or benchmark for measuring the performance of ESG within a portfolio.

Increased disclosure, greater transparency and more standardized metrics would, therefore, likely better enable investors to evaluate different managers and offerings. Given their increased appetite in that regard, managers will do well to adhere to this.