ESG factors are of increasing importance to institutional investors in the real estate sector, according to the PERE ESG Investor Survey 2019. The survey, sponsored by LaSalle Investment Management, shows that environmental credentials and governance are key considerations, especially throughout the due diligence process. There are, though, clear regional differences in ESG attitudes. The following eight charts showcase findings from the study and offer a closer look at investor sentiment.
Proponents of ESG will be delighted to see that nearly all respondents of the study are of the belief that ESG principles have a role to play in making investment decisions. On a global level, more than one-third of respondents expressed that ESG plays a major role in their decision-making process.
From a more granular perspective, Europe continues to build upon its track record for being the most sustainable-focused region:
45 percent of Europe-based respondents consider ESG plays a major role, a sentiment which is in stark contrast to North America (25 percent).
Real estate investors are paying closer attention to the level of ESG commitment across sectors. Our study reports that most investors have experienced moderate or significant progress toward ESG commitment, though the level of progress varies across sectors. Investments into office space have made the greatest stride, with 80 percent experiencing moderate or significant progress. On the other hand, 48 percent of investors have experienced little or no progress with retail investments. Looking ahead, this disparity will become more notable as ESG commitment becomes a more important factor in the decision-making process.
Our study found that investor sentiment in favor of ESG initiatives is on the up: 35 percent of investors already require private real estate firms to implement ESG initiatives, with 13 percent making this a requirement over the next three to five years. Fund managers will do well to embrace ESG as a core part of their proposition, especially as nearly half of all respondents said that they would not invest with a manager that does not have a defined ESG policy.
Need for transparency
When it comes to carrying out due diligence on fund managers, ESG takes center stage for many investors: 61 percent of respondents believe that evidence of ESG policy implementation is very important, followed by a clear policy and approach. With investors paying closer attention to transparency, the ability to demonstrate ESG integration becomes a greater and more important challenge for fund managers to face.
Room for improvement
It is clear from our study that investors are becoming more focused on ESG integration, though there remains room for improvement. Globally, less than a quarter of investors work to a policy whereby investment is restricted with managers that fail to meet certain ESG due diligence criteria. In North America, only 7 percent of investors work to such a policy, though this is unsurprising given that 85 percent of these investors would consider investing with a manager that does not have a defined ESG policy.
Looking for returns
Respondents had a clear view on the ESG component that has the greatest influence on returns. Of the three components, investors believe environmental factors are the most likely to affect investment returns, with social in second place.
Measure for measure
Measurement is one of the greatest topics of discussion among investors and fund managers. Over half (55 percent) of investors measure the correlation between the strength of a fund manager’s ESG policy/initiatives and the investment return they are seeing. Of the investors that do measure this correlation, the majority find this to be somewhat or extremely difficult. A mere 6 percent of investors said measuring this correlation is easy.
Supporters of ESG will also be pleased to read that overall, investors are optimistic about the value versus cost of ESG policy implementation: 43 percent believe the value of ESG is greater than the cost of implementation, with a further 12 percent stating that the value is on par: just 6 percent of investors consider the cost of implementation to outweigh the value.
Nicole Douglas is head of investor research for PEI’s Research & Analytics department. In addition to overseeing the PERE ESG Survey 2019, she is also responsible for the annual Macquarie PERE Global Investor 50, ranking the largest institutional private real estate investors.