The majority of institutional real estate investors are demonstrating a commitment to ESG investing and building the resources required to implement policies in this area.
Globally, the majority of institutions surveyed have established an explicit ESG policy. However, there is considerable regional variance. Respondents headquartered in Europe lead the way, with 77 percent of respondents having an ESG policy, compared with 65 percent of respondents based in North America and 56 percent in Asia-Pacific.
Alan Dalgleish, chief executive of Asia Pacific real estate funds body ANREV, says: “We see a growing commitment to ESG from investors and the wider real estate industry in this region, with investors from Australia tending to lead the way.”
Bill Schwab, principal at Real Estate Investments and formerly global head of real estate at Abu Dhabi Investment Authority, says forming an ESG policy is not just about a real estate investor’s portfolio. “When it comes to recruiting and retaining a workforce, to motivating people, it is increasingly important to be seen to be on the right side of history, which the ESG movement is.”
Over half of respondents have established a resource responsible for ESG issues. This is more likely to take the form of in-house staff rather than outsourcing to a third-party consultancy. Dutch pensions group APG has dedicated significant resources to its ESG team, explains Derk Welling, senior responsible investment and governance specialist at APG. He says: “Our global responsible investment and governance team consists of 17 full-time employees, each of whom has a specific area or asset class focus.”
Close to one-fifth of respondents do not currently have a dedicated resource, but say they plan to establish this resource in the future, suggesting ESG policy is growing in importance among investors. However, there is still a sizable rump: almost one-third of respondents say they do not have a specific ESG function and have no plans to add one in the future.
Almost all (95 percent) of respondents say ESG principles have a role to play in making their investment decisions. Moreover, one-third of respondents globally say they believe ESG plays a major role in the decision-making process.
Asia-Pacific respondents demonstrate some mixed feelings about ESG policy, as respondents display nearly balanced sentiment. In North America, nearly one-third of respondents consider ESG principles a factor of secondary or tertiary importance, while 25 percent of respondents consider it a major role. Again, Europe, in which 45 percent of respondents consider ESG to play a major role, is ahead of the rest of the world. A further 35 percent of European respondents use ESG policy as a guide, and only 10 percent consider it to play a minor role.
APG is one investor where ESG considerations are front and center in decision-making. Welling says: “Our approach started with governance, voting and exclusion. Now it is fully integrated and more about inclusion and engagement. Further, the department has a vote in the investment process and we can provide an unconditional, conditional or negative signoff on an investment by any of the investment teams globally.”
Billy Grayson, executive director at the Urban Land Institute’s Centre for Sustainability and Economic Performance, says: “For some investors, ESG may play a small role in their investment decision, but not be the deciding factor. Potential investments with ‘good’ ESG may get a couple of extra points in the analysis, or investments with ‘less good’ ESG reporting or performance may lose a couple of points.”
Investors drive ESG
Globally, investors are somewhat split as to whether they would invest with a manager that does not have a defined ESG policy. On a regional level, investors headquartered in Europe and Asia-Pacific are more reluctant to invest with a manager that does not have a defined ESG policy. However the vast majority (85 percent) of North American respondents would invest with a manager lacking a defined ESG policy.
“If we came across a manager that did not have an ESG policy, we would require that it develop a policy within a set time frame, in order that we do business. We believe better managed companies and management teams pay attention to ESG,” says Welling, again demonstrating the sterner ESG demands European investors make of their managers.
Investors are the primary drivers behind fund managers establishing an ESG policy, according to the managers themselves. When asked their thoughts about the drivers behind managers establishing an ESG policy, investors believe that the manager’s need to meet investor demand tops the list. Dalgleish says: “Globally, the major driver for ESG policy in non-listed real estate is the demands of investors.”
About half (47 percent) of respondents believe the ability to mitigate against investment risk is a driver, while 17 percent do so in order to adhere to regulatory demands. Schwab says: “It is simply good business to be sensitive to ESG factors because costs which used to be externalized are being internalized. For example, if a company polluted a river, society had to pay. Now legislation means the polluter must pay. So some of those externalities will now be internalized via regulation or pricing. So it is smart business to factor in ESG.”