How has covid-19 impacted ESG progress?
Peter Holden: Covid has undoubtedly had an impact on ESG. In many cases, the pandemic has acted as a positive catalyst for ESG and prompted calls for a different approach to investing. As a responsible investor, throughout the pandemic, we have remained committed to delivering meaningful stakeholder impact and meeting our sustainability goals.
Managing director and co-head of private real estate asset management, Partners Group
Global head of strategic insights, Nuveen Real Estate
Global head of ESG, LaSalle
Head of ESG, Hines Europe
Abigail Dean: The existential threat and disruption posed by the pandemic has drawn obvious parallels with the climate crisis. It has provided a glimpse of the scale of the challenge that we are likely to face, but it has also shown the possibilities of global scientific, governmental and business action. Social inequality has also been exacerbated by the pandemic and the investment community is certainly more focused on this issue alongside climate.
Daniel Chang: The real estate sector has a pivotal role to play in mitigating the impact of climate change and creating healthy and resilient communities. More now than ever, we have seen that this resonates with our investors and occupiers alike, who have also been stepping-up their ESG focus. Hines has a long-term desire and commitment to ensure ESG is at the front and center of real estate decision-making and we will continue to embed it into the business and set ambitious targets for ourselves and our projects.
The world is racing to meet targets by 2050. Can real estate deliver?
PH: To meet net-zero targets, we need better buildings. We have the technology to decarbonize real estate and we are making significant gains by switching from fossil fuel to carbon-neutral electric power, and also through implementing energy efficiency initiatives and controlling consumption with demand-side measures. However, that only takes us part of the way. We also need to replace gas heating in older buildings with carbon-neutral technologies, for instance through looking into onsite renewable energy generation.
AD: The scale of the challenge of achieving net zero for real estate is significant and the industry must face up to that challenge. However, the positive news is that the technological solutions to deliver net-zero carbon buildings already exist. The cost of these technologies has reduced dramatically in recent years and the cost is likely to come down further. What is needed is a globally recognized certification for net-zero carbon buildings. This will enable occupiers and buyers to recognize these buildings and will drive up their value.
DD: The real estate industry has a tremendous opportunity to lead as the world transitions to a net-zero carbon economy. We are integrating a net-zero carbon mindset into our business processes and into our investment products. It’s not just the right thing to do, but we can mitigate risk and improve financial performance.
DC: The real estate industry is equipped and able to deliver on the Paris Agreement by phasing out the installation of fossil fuel heating systems in new and existing buildings along with the decarbonization of electricity.
From our experience, in addition to proactively designing for lower embodied carbon and optimizing operations, focusing on transforming heating, ventilation and air conditioning systems, we have seen significant reductions in the carbon intensity of buildings which align with a 1.5C pathway.
Aside from net zero, what is the biggest ESG-related challenge for real estate owners?
PH: Data collection. It has been a big challenge across the industry for global managers to gather information from a cohort of local operating companies that often have different languages, legislation and cultures. The next challenge for the industry is social impact. Our clients’ investments are only as strong as the communities in which they sit, so investing in these communities and creating jobs is fundamental to delivering sustainable returns.
AD: Social inequality. Real estate owners have an obvious role to play in delivering socially useful buildings, such as affordable housing and healthcare, and also in ensuring good employment standards in their supply chain. The challenge is to deliver good returns alongside social impact, but this is a challenge that the real estate industry is rising to.
DC: Transparency around upstream and downstream emissions data, which includes the embodied carbon being emitted from supply chains through to tenants’ energy usage. The challenge is ensuring this is accurately represented but then also working to find bespoke solutions for existing assets to help lower these figures while minimizing disruption.
What is the most common ESG-related question you get from investors?
PH: What are you doing to help us meet our Paris Agreement obligations?
AD: “How do you manage climate risk in the investment process and what is your pathway to achieving net-zero carbon?” Many of the investors we work with have set their own decarbonization goals and they need to understand how investing in our strategies will support them in meeting their goals. They also want to be reassured that our goals are credible, achievable and well thought through.
DD: Today, concerns over climate change are prevalent. Both climate risk and net zero are hot topics with investors. Simply put: “What is your plan to move forward?” is a common question.
DC: Initially, investors were interested in understanding whether there was an ESG strategy in place and what that strategy looked like. More recently, they are very much wanting to get into the details of what the carbon strategy is and what the mechanics are to achieve net zero.
What are the most important KPIs for demonstrating ESG progress?
PH: The KPI marketplace is crowded. I know of 80 certificates for green buildings in design and construction, 75 for buildings in use, and 40 separate energy certificates. To obtain these, many ESG KPIs need to be met, ranging from resource intensity to social impact. We need transparency and a set of global standard industry metrics.
AD: Carbon emissions per square meter and per million dollars invested are the most important metrics, but there are a whole host of supporting metrics that we report against, such as energy use per square meter, renewable energy produced on site and proportion of building energy that is supplied by renewables.
DD: Today, many investors look to the larger picture and are interested in our GRESB scores. Those ESG scores relate directly to the products where investors invest. This year, we increased our reporting by 55 percent and earned five Five-Star-rated funds with at least one Five-Star fund from each global region.
DC: The key metrics we use for demonstrating ESG progress include the carbon intensity of a building, its alignment with the scientific pathways and if the building has the risk of being stranded. Reporting on progress against social initiative targets is also important, as is reporting on progress made against environmental targets such as utility consumption. Future metrics may seek to monitor how much CO2 waste a building has produced compared with its consumption, which will highlight the overall carbon efficiency of a building.
What does the future hold for sustainability in real estate?
PH: I think we will see more short-term thinking: buildings for now and not forever. Buildings designed to be built in factories, erected safely on site, and run on green electricity. Buildings made from components that are demountable and re-useable at the end of a building’s life to avoid waste going to landfill – more of what we now call the circular economy.
AD: Green infrastructure will be at the heart of the transition to the low-carbon economy. The provision of sufficient renewable energy to meet all needs, the roll out of electrical charging for cars and the provision of other green transport options are all critical.
DD: In cities with higher levels of climate risk we should expect an acceleration of investment in ‘hardening’ infrastructure to make communities more resilient to climate change. Related to this, I expect a rapid increase in alternative energy solutions. Infrastructure investment will make cities more resilient, move liveable and more desirable for the future.
DC: We expect to see more integrated solutions with larger collaborative efforts. We’ll start to see a shift away from the linear approach where a building is only a consumer of energy to more of a ‘prosumer-based’ approach.
Buildings in the future will not only be able to produce their own electricity and heat but they will also be designed to reduce their overall demand on the communities surrounding them.