This article is sponsored by Nuveen Real Estate.
From climate change and geopolitical tensions to rising inequality and a global pandemic, society faces many challenges and investors are seeking ways to be part of the solution. Increasingly, they are going beyond traditional ESG principles and responsible investing strategies. They want investments that intentionally produce measurable benefits for people and the planet, and they are finding them with impact investing.
Real estate is a natural home for impact strategies. More than any other sector, the built environment shapes people’s lives. The impact it can have on people and their home and working lives is far greater than most other areas of commercial activity. But how can impact investing deliver on its intentions? Crucial for success is the ability to integrate impact measuring and monitoring with the investment management process.
Integration is key
Along with financial returns, impact investing requires additional objectives and results. Given the many challenges we face, impact strategies need to clearly define what they want to achieve, how they plan to do that and how to measure success. Traditional investment management methods need to be broadened into a more comprehensive impact measurement and management system. This means adding key performance indicators (KPIs) specific to the impact objectives and distilling the metrics and targets to improve efficiency and refine analysis. Nuveen follows a six-step process for impact investing that integrates impact theory with investment analysis and management.
1 – Develop the impact strategy and goals
It is important to establish the impact themes from the outset. This involves investors selecting the issues they wish to address and then exploring the potential positive impacts their investment could create. For real estate, that could be rising inequality with the provision of affordable housing and social infrastructure, such as educational and health facilities, or tackling climate change and sustainability with energy efficient buildings.
Once the broad themes are set out, the next step is to define a theory of change to help articulate the expected impact and how it will be achieved. Essentially, this establishes a clear vision; it defines the goals, the strategy and the intentionality behind them. The strategic impact objectives can then be derived from the impact themes and the theory of change.
The final part at this stage is to select the KPIs, which link the intent and contribution of the investment with the quantifiable improvement in social and environmental outcomes. For example, key metrics in the affordable housing space are the number of underserved tenants provided access, the average differential to market rent, energy savings in buildings and sustainability certifications.
2 – Sourcing and due diligence
The due diligence of potential investments must attempt to assess any unintended outcomes. Sticking with the affordable housing example, gentrification is a classic negative side effect. True regeneration must be geared toward benefiting existing communities and safeguarding improvements for at least one generation.
Any potential impact investment should also be assessed for its alignment with UN Sustainable Development Goals. For example, housing affordability, social inclusion and carbon reductions are easily identifiable as the most relevant SDGs for residential real estate investors.
Throughout this step of the process, ESG and impact criteria should also be reviewed regularly and compared with the plan created at step one.
3 – Portfolio management
The measurable indicators established in step one need to be monitored and actively managed toward meaningful value creation. This involves input from key stakeholders, such as tenants, clients and suppliers. Processes must be established to address any deviations from the expected positive impact and to mitigate any negative impacts. This might include direct engagement with investees or property managers to troubleshoot problems that arise. Crucially, the investment’s positive impacts should be evident at this stage.
4 – Measurement and reporting
At this point, data on impact KPIs is collected and analyzed and then reported to clients and the public. Transparent, solid and comparable impact reporting will help provide investors with the information they need to assess whether the initial objectives set at the impact development stage have been met. The insights gained from analyzing the data can then be used to inform future impact investments.
5 – Exit responsibly
Before exiting, investors must assess whether the investment completed its goals in terms of both the impact and the financial return being achieved. Due diligence with bidders will take financial and non-financial matters into account, with the ideal purchaser aligned to the investment’s objectives and experience in impact investing.
6 – Disclosure and verification
The final step is to publicly disclose the impact measurement and management approach; the use of common approaches and standards is one of the ways to help impact investing to grow and improve across the real estate sector. Several global organizations offer impact frameworks and metrics that are widely used, including the Global Impact Investment Network (GIIN)/IRIS, Investing for Impact, the UN SDGs and GRESB. And, of course, it is important to obtain independent verification of the approach used.
Return and reward
Impact investing seems to be a natural culmination of ESG investing and a response to the global trends shaping society. The elevation of an investment’s social and environmental criteria to sit alongside financial return, and share the same level of scrutiny and accountability is a welcome step forward. In the future, an ideal state may be one in which we no longer view impact investing as a separate category but where environmental and social impacts have been fully integrated. Profit will be combined with a wider purpose, thus creating sustainable long-term value.
Impact investing offers an opportunity for the investment community to address some of society’s fundamental challenges and for investors to act with confidence that their investment is delivering long-term sustainable returns for the widest set of stakeholders.
The economic opportunity that comes with addressing society’s needs offers differentiation opportunities to institutional investors. We also believe it is possible to achieve financial returns while also meeting long-term community needs and being a responsible steward for the planet when investing in buildings.
Making an impact in Europe
The continent’s diversity requires both international and local policy and investment solutions to tackle rising inequality
Over the last 10 to 20 years, European countries have experienced a rise in inequality, which almost all commentators across the political spectrum agree needs addressing. While priorities and best practice to solve this problem remain contentious, there is broad agreement that sharply rising housing costs is an economic as well as a social issue.
If nothing else, lower-income workers unable to afford housing within reasonable distance to their workplaces creates serious economic inefficiency resulting in lost GDP growth. The current global pandemic has laid bare the vital economic purpose of many low-paid professions. Our research shows that the risk of economic exclusion rises in the most successful European cities. However, attempting a top-down, one-size-fits-all strategy for affordable housing, community buildings or education will not work.
Each European country has its own unique set of challenges and is experimenting with a wide range of possible solutions. To add to the complexity, the larger cities, even within one country, have distinctive local requirements and housing policies. So, for each project to be effective for the community and economically successful for investors, it has to fit into national and regional policies and engage with local stakeholders.
The same is true for carbon reduction and other environmental issues. The broad goals are the same across Europe and beyond, but the path to reach those goals is varied and local.
Consider Germany as an example. Inequality is an issue and the demand for rental space is at an all-time high. Nuveen has identified over 40 cities in which low and middle-income earners tend to pay more than the commonly accepted 30 percent of income threshold for rent.
An impact real estate strategy can provide access to affordable and sustainable housing by improving availability of units priced within range for low-income or underserved individuals. Specific solutions include regulated or restricted affordable housing, mixed-income housing, and provision for underserved or vulnerable populations, such as seniors or students.
Abigail Dean is head of sustainability, Europe; Stefan Wundrak is head of research, Europe; Maria Grubmueller is a senior research associate; and Tanja Volksheimer is a senior