This article is sponsored by Savills Investment Management. It appeared in the Investor Perspectives 2019 supplement with the March 2019 issue of PERE magazine.
Sustainable investing and ESG have risen up the agenda in the real estate investment world in recent years. Pop along to any industry event or conference and the topic is more than likely going to feature as a key talking point; an indication that the matter is being taken seriously. So it was a surprise that only 37 percent of respondents to the PERE Investor Perspectives 2019 survey declared it a major consideration during their fund due diligence. PERE’s Helen Lewer spoke to Savills Investment Management’s head of ESG, Lucy Auden, and director of investment, Lucy Winterburn, to get their expert take on current investor and manager attitudes to ESG, and where the industry is at in terms of meeting its sustainable goals, and discovers an altogether more rounded and positive picture of the sector’s commitment.
PERE: How committed are investors to ESG and sustainability now? Are you seeing greater articulacy around these issues?
Lucy Auden: Institutional investors are now articulating clearly to their managers their expectations and goals on ESG. In the last three years in particular, investors have shown greater depth to their knowledge of the issues and precision of their queries to us. In the past, for example, we would get asked a fairly simple question: ‘Do you know what ESG is: yes or no?’ Now it is common to receive two pages of very detailed questions, and they factor in the responses to their manager selection. Last year, we asked our investors how influential ESG was to their selection of managers and products on a scale of 0 to 100, zero being not important at all and 100 being absolutely essential. On average, investors ranked ESG as highly influential, scoring 77 on that scale. I think that speaks to the articulacy of investors on the topic and how important it is to them nowadays.
PERE: What factors have driven up the level of awareness and knowledge of ESG issues in such a short time period?
Lucy Winterburn: One of the key drivers is the ability to attract tenants to buildings. Just to give you one illustration, in the office sector tenants are increasingly concerned with how they are going to retain talent, so they want to ensure they lease property that provides the ‘right’ working environment, where staff will want to come to work, enjoy their working environment and where increased work output is tangible. So investors, and their managers, are proactively future-proofing their assets to meet ESG goals based on changing tenant needs. There is just a general recognition that this is the right thing to do. If you are developing a building today, it is very obvious that it is relevant for a tenant taking space today but also for that future occupier and what that demand might be in order to have the widest possible market appeal. Flexibility in design is really important – one size does not fit all.
LA: I think that’s right. There’s a realization now that real estate is essentially a people-oriented business so we, investors and mangers, really need to be thinking about people’s welfare in the assets we own and manage. Also, historically there are certain types of investors, like insurance and pension funds, that have been particularly proactive in pushing forward ESG, driven in large part by their boards and underlying beneficiaries placing sustainability high up on their corporate agendas, so these issues have become very material to these types of investors as a result. And that is where a lot of the drive has come from.
LA: Policymakers are also driving increased awareness and commitment to ESG in the sector through initiatives like setting country-wide decarbonization emission targets. ESG is no longer a ‘nice to have’. It has become a regulatory, legislative and compliance concern too. Real estate investors and managers have to be part of the conversation if they are going to successfully let their buildings.
PERE: Is it challenging to align investor and manager goals on ESG?
LA: In our experience, there’s something inherently collaborative about ESG because the end game is essentially to improve the environment and social sustainability for everyone. All stakeholders in every sector are dealing with the issue now; it’s everyone’s responsibility – investors, managers, tenants, policymakers, industry bodies – and all of these parties need to talk to each other. There just seems to be a sense of common goal that is driving forward ESG and sustainability, and we are seeing this play out in the real estate investment world too.
As a manager, we’ve found a lot of opportunity to engage with our investors on sustainability. For example, we recently surveyed our clients in order to really understand what issues are material to them. This has given us a clear picture of what the hot topics are for them right now and it has directed our own policies and approach. Having that kind of dialogue early ensures investors and managers are singing from the same hymn sheet.
PERE: Delivering a consistent approach and outcome to ESG across a diverse property portfolio must be difficult. What is your experience?
LW: It’s definitely challenging. I look after a multi-asset, predominantly commercial, UK portfolio. The retail and office sectors, particularly city offices, have led the way in ESG considerations and how owners and occupiers run their buildings. The motivation is driven by sophisticated corporate tenants that are fully up to speed with the benefits of ESG and that, from a reputational standpoint, need to be seen to be taking the necessary steps to improve their performance in this area. It is also easier to integrate ESG into assets that are being redeveloped or refurbished. As a manager, this is the moment when we can collaborate with end users and identify where there are opportunities to improve the sustainability credentials of the building with a drive to implement measures that could help to reduce that asset’s carbon footprint.
LW: Development and refurbishment opens up new windows of opportunity to integrate ESG into the portfolio. We have also been able to take lessons learned from redeveloping buildings, especially in central London and major cities, where there is real demand from tenants to go the extra mile on ESG, and apply them to assets in the portfolio where historically sustainability has been perhaps less of a focus area. Industrial assets can be quite soulless, concrete and cladding heavy places for staff to work in with very little regard paid to the built or landscaping aesthetic. It is often a case of function over form. In a 300,000 square foot scheme that we have recently submitted for planning in Oxfordshire, we were keen to include some of the initiatives learned from our experience in the office sector to improve the industrial offer. This includes the provision of ample green and social spaces shared by the industrial premises to encourage exercise and promote health and well-being. We see this as a real opportunity to differentiate our offering from the more mainstream industrial development.
LW: It is much more difficult to integrate ESG features into existing assets in the portfolio, particularly in the case of single-let buildings where as a manager your hands are tied unless the tenant is happy to engage with us to improve sustainability. Often this requires us to prove that ESG adaptations will translate into a tangible cost saving or benefit to the tenant in the long term.
With a multi-let building, where there are common parts shared by several tenants, it is generally easier to take steps to improve the sustainable features of a building. And often that also opens up a wider conversation with individual tenants about making improvements within their own leased space.
But generally, yes it is easier to improve sustainability in a redevelopment project, and taking steps forward in ESG is easier in some property assets than in others. Achieving consistency across the portfolio is a challenge. And a constant dialogue among all key stakeholders to drive the agenda forward is critical to meet targets.