Nuveen: Keep an eye on sustainability

This article is sponsored by Nuveen Real Estate

The economic outlook for the next few months is going to be a challenge across the board, but – due to existing long-term commitments being made from real estate managers and investors as well as increasing regulation – the industry is not going to push pause on sustainable investment, say Jessica Long, Mark Cameron and Richard Hamilton-Grey, Nuveen Real Estate’s heads of sustainability in the US, APAC and Europe.

How will the momentum around ESG and net-zero carbon play out in a likely challenging 2023 environment, with tighter returns and rising interest rates?

Jessica Long: No matter where you are in the cycle on the economic side, these environmental and social challenges are structural changes that are not going away. Discipline is required to stay focused on achieving those long-term goals. Nuveen Real Estate sees sustainability as a core part of its DNA.

Firms must assess the progress and the pace that local real estate markets are adopting sustainability strategies and prioritize the progress they can reasonably make during the next year or so. This can be useful to stay on the same trajectory to meet market expectations, even if they don’t get as close to their goals as originally expected.

Richard Hamilton-Grey: We see a critical mass of momentum facilitated by regulatory and market drivers. Examples include regulations such as the European Sustainable Finance Disclosure Regulation, and market-backed initiatives such as GRESB, which releases an annual real estate assessment that captures information regarding ESG performance and sustainability practices for real estate funds.

This year, GRESB awarded 15 of our funds with a 4- or 5-star rating, reflecting upper quintile performance compared to other participants, as well as achieving global and regional sector leadership. In addition, you have existing capital committed based on the long-term ambitious commitments of market participants – such as our own 2040 net-zero carbon target, which has a set of interim milestones on which we are following through.

How does the growth in the alternatives sector lead you to think about ESG performance and net-zero carbon differently compared with the traditional property asset classes?

Mark Cameron: We see great opportunity in alternatives both in Asia-Pacific and across the globe. The growth in alternatives provides an opportunity to drive more performance and focus on ESG than perhaps there would normally be across the traditional sectors that are now well versed in what needs to be done.

Across many aspects of the alternatives space there is greater societal pressure to focus on sustainability, particularly on social value and community. For example, we recently developed several purpose-built student accommodation assets in Australia. At their core, we are looking to provide an environment where ESG and social value is authentically delivered.

The same could be said for senior living. Again, it is all about community, connecting to local society and building up a positive, engaging environment.

Moving to net-zero carbon presents opportunities for certain alternatives. For the many subsectors, resource consumption is lower than for traditional sectors with greater opportunities for on-site renewable energy for example, meaning the path to net zero is potentially clearer. Similar to traditional asset classes, one area of focus is around partnership; working together with users, our customers and operating partners to driver efficiency, switch utility sources and co-develop programs to realize net-zero goals.

How do you use ESG performance data to drive better decisions?

JL: Nuveen Real Estate uses market research ESG data and portfolio performance ESG data. Unlocking and evaluating that data supports our understanding of what is happening at the building level – to measure the risks and opportunities – and develop a sound business plan. That requires collaboration to support the asset management team responsible for that building.

We have recently implemented a Smart Sustainable Building Blueprint for the different real estate sectors we invest in. Each blueprint categorizes building ESG features or operational best practices based on the area of building performance being addressed, the expertise required to implement cost-effective solutions and the relevant stakeholder set. It acts as a tool to help our investment teams identify and prioritize implementation strategies for assets in each sector as well as a framework within which we set and measure progress towards operational goals.

The other piece is the broader market data for the sectors and regions where we invest. Our Insights team, which comprises sustainability and research capability and advises the investment teams, considers the expectations for sustainable buildings. We consider the ESG risks and opportunities and how that may influence the investment strategy. We make sure the relevant data is getting into the hands of our investment team at the appropriate time – be it an acquisition or the launch of a new strategy – to ensure the ESG integrated investment decision is required today, and even more so in tomorrow’s world.

Which sectors and markets are best positioned as we think about net-zero carbon?

JL: Sustainability has been a long-standing part of office real estate investments. Owners and operators have a lot of operational control on large central plants and the ability to control the meter or the HVAC system; this is paired with the financial incentive from office tenants’ demand for “green buildings.” On the other hand, in industrial real estate the landlord has less operational control but assets have huge flat roofs that are ideal for onsite solar panels that, in a lot of cases, could almost be self-sufficient from a net-zero perspective.

MC: Some markets are certainly going to be easier than others to get to
net-zero carbon. We are likely to see grid carbon intensity become a consideration when assessing investments, with more favorable weighting to markets with lower utility grid intensities. We factor this into our product strategy development and as part of evaluation of prospective investments.

In Asia-Pacific, we have seen Japan and Korea for example starting to open up energy markets, offering the choice to source renewable energy directly from the utility grid or via PPAs. This opening up will likely continue alongside investments in renewable energy towards decarbonization, with the speed of transformation being key.

RHG: Across our European office portfolio, supported by our partnership with leading operators and developers, we are already delivering net-zero carbon buildings – particularly within those markets where we see this being an expectation for prime assets today – for example in Amsterdam and London.

What role can real estate debt play in the net-zero carbon transition?

MC: The growth of sustainability in the real estate debt space has been different from what we see elsewhere in the market. As awareness of sustainability and acknowledgment that action is needed has increased, it is becoming much more common to see sustainability performance metrics linked in loan covenants. This demand for sustainability-linked loans is being driven from lenders and borrowers.

RHG: Over recent years, we have seen a step-change in the role of debt investment in driving the sustainable transformation of the real estate market. We see an opportunity in engaging with sponsors on sustainability issues, and where relevant providing structural loan incentives based on the strong sustainability performance of underlying real estate – be that, for example, achieving net-zero carbon or high levels of sustainability certification.

In addition, in the US we have seen increased investor appetite around Commercial Property Assessed Clean Energy loans (C-PACE). Offered by our affiliate Nuveen Green Capital, C-PACE is a state policy-enabled financing mechanism that allows commercial building owners and developers to access low-cost, long-term, fixed rate capital they need to make energy related deferred maintenance upgrades in their existing buildings, support new construction costs and make renewable energy accessible and cost-effective. C-PACE is helping to decarbonize the built environment while also providing a very accretive form of construction financing.

What regional differences do you see across your global real estate portfolio in terms of market and regulatory environment?

RHG: Policies and regulations will continue to be introduced across the globe to mandate the 2050 net-zero carbon deadline. Already, we see strong evidence of market expectations changing as environmental issues move up the political agenda. As momentum grows, we plan to be net-zero carbon across the real estate that we manage by
2040.

Transition risk and opportunity will be particularly significant in Europe. There is strong engagement from governments, investors and businesses on this issue, so policy risk, market shifts and technological innovation are all likely to move swiftly.

This is why some of our European strategies have already decided to accelerate their net-zero carbon target to a 2030 deadline in order to best position the portfolios and protect against long-term value.

In the US, this transition to net-zero carbon is also expected to take place more rapidly in coastal urban markets, where there is a strong demand for climate action among residents, local government and the global corporate occupiers that take space in these locations.

We are monitoring indicators across the globe that show the transition is picking up pace. We continue to assess climate risk as part of the investment process and build out net-zero carbon business plans across our investments.

“We see strong evidence of market expectations changing as environmental issues move up the political agenda”
Richard Hamilton-Grey

MC: In Asia, the regulatory environment has typically lagged slightly behind what we see in Europe. Europe is taking the lead globally on regulation and setting market expectations around sustainability. With European investors increasingly looking to deploy capital to Asia this is influencing the market to adopt more ambitious targets and measures.

Alongside this market expectation from investors and occupiers, we also see the adoption of regulation in Asia ramping up across jurisdictions. For example, we have Singapore looking to take a leadership position with the Singapore 2030 Green Plan and recent ESG reporting reforms through the Monetary Authority of Singapore.

There is an openness to more regulation in the region, particularly as Asia’s cities face physical risks associated with climate change. I expect that to remain.