Investment manager M&G Real Estate is expanding the focus of its sustainable and responsible property investment from green issues to look more incisively at wellbeing and the social impact of its investments. Nina Reid, director, responsible investment at M&G Real Estate, talks to PERE about this evolution in strategy for the manager’s £31.1 billion global property portfolio and the drivers behind it.
PERE: How has the role of real estate investment managers such as M&G Real Estate in sustainability evolved over the past decade; what pressures are you facing in this area?
Nina Reid: There has been a significant shift in investor interest in sustainability over the past decade. When I started at M&G Real Estate seven years ago, investors might ask: “Are you in the UN Principals of Responsible Investment?” Today investors interrogate you about your GRESB score and require specific information if that score is at the lower end of expectations. We are more frequently questioned about topics such as EPC rating, the number of green buildings in the portfolio and the overall environment, social and governance (ESG) strategy. This is only going to increase, particularly given the focus on the Taskforce on Climate-related Financial Disclosures. The larger Nordic and Dutch pension funds are leading on risk reporting around climate change, so we will get an increasing number of questions about climate change risk and how we manage that.
PERE: M&G Real Estate has relaunched its responsible investment strategy; is this in response to the changes in investor sentiment over sustainability? How does the new strategy differ from M&G Real Estate’s earlier approach?
NR: M&G Real Estate has had a responsible property investment strategy for over a decade but this was last reviewed when I first came into the role, so we took the opportunity last year to review what is happening in the market and whether our priorities were correct. During that period, not only have we seen changes in investor requirements, we’ve seen changes in occupier and legislative requirements. We are also a much more global fund manager now, so we wanted something that worked globally. We did a lot of engagement, both internally and externally and as a result of that we have our new responsible property investment strategy. We still have a very strong environmental theme, but what we’ve introduced to the strategy is measuring our socioeconomic impact: factors such as job creation, how much money does consumer spending at our retail assets put back into the broader economy? We were one of the first fund managers to look at this at a global level and we expect investors increasingly to ask about this in the future. We are in the early stages of these considerations, so our primary focus is on measurement, but the next stage will be to examine what we can do in this regard.
We also have a major focus on health, wellbeing and occupier experience. M&G Real Estate has always had a strong occupier engagement program. However health and wellbeing has come to the fore over the past couple of years. Looking at how we can embed that in the design and management of our buildings is a really big change to our strategy. In the office sector, corporate occupiers are very keen on wellbeing because of its link to productivity, so they are engaged more than they were with green buildings.
We are also doing more work at our retail assets on inclusivity, making our buildings accessible to all. We have been doing a lot of training with our onsite teams at both retail and office assets. For retail, we also consider things such as, how to support people with autism. How do you support people with dementia and their carers? Small things can really improve their shopping experience and we get a huge amount of positive feedback. We’ve been rolling out, in addition to existing disabled toilets, facilities commonly called Changing Places; these are toilets for people who can’t access standard disabled toilets and have more space and the right equipment. We get a lot of positive feedback about how life changing this is for people who can now access a shopping center knowing they have a toilet they can use in safety and comfort.
These initiatives are less investor-led, but I think as we see a rise in people using the UN Sustainable Development Goals as a framework and trying to attribute a certain amount of investment to those goals, there will be more questions around job creation and other community impacts.
PERE: How helpful are initiatives such as the UN Sustainable Development Goals, Principles for Responsible Investment and GRESB? How valuable are they to investment managers?
NR: The PRI has obviously been hugely important, a ‘must have’. For unlisted real estate, GRESB is the main tool investors are using to compare performance. In many respects it has been hugely helpful because it gives us a very clear framework of activities that we need to implement, and it enables us to engage with fund managers about their strategy and key initiatives. The downside with any set benchmark is that it might miss things that are potentially really important. So at the moment GRESB is relatively light on the socioeconomic side, for example. Our focus on that doesn’t get us much credit in GRESB, although over time that could change. So these initiatives are important, but they can’t be the only tool you use to set your approach. I think you have to work out what the key risks and opportunities are for each fund and set your strategy accordingly.
PERE: How important is it for investment managers to engage with occupiers on sustainability matters?
NR: It is a mixed environment in terms of occupier engagement and interest. A lot of occupiers are concerned about sustainability at the corporate level but it might not be at the top of their mind when it comes to real estate. Wellbeing is a really interesting area because it’s the first time that I have felt occupiers are really engaged and they will become increasingly specific about what they want in this regard. They need to attract and retain staff, and they know that having buildings where people want to work is important in this. So there is a natural link. In retail, the picture is variable: some occupiers are really leading on sustainability but others are going through tough times and their main focus is the bottom line. You can tell them installing LED lighting will save them money and will have a payback in probably less than two years, but they’re not always that interested.
PERE: Will there be an increased need for sustainable financing in the real estate sector?
NR: There will be a growing need to finance improvements in a way that real estate is perhaps not used to. For example, to meet the carbon reduction targets set out in the Paris Accord, that is going to require significant amounts of capital improvements which may not have been factored into investor thinking. There are also technological factors: how is the property world going to adapt to electric vehicle charging points? If you need capacity you’re probably going to have to get battery storage onsite. If real estate owners want to own batteries, how will they invest in that? M&G Real Estate last year launched an Impact Financing Fund, a debt product that is very much focused on targeting positive environmental and social impact through its investments, which can include real estate.
PERE: For a global investor like M&G Real Estate, how difficult is it to integrate ESG principals across a portfolio with so many different assets in different jurisdictions?
NR: There are certainly difficulties, but consistency is much higher than might be expected. For example, our Asia fund invests in core institutional properties, so actually the assets have Green Building Certification, generally pretty high environmental standards and run community programs at retail assets. In almost every market, legislation is driving up energy efficiency. The wellbeing discussions are penetrating at the core end of the market. We would still like more consistency globally though.
This article is sponsored by M&G Real Estate. It appeared in the Sustainable Investing special supplement that accompanied the October issue of PERE magazine.