Six key trends in private real estate’s the race to net-zero emissions

    How to get to net-zero carbon emissions is the question preoccupying every private investor and asset manager. Here are six key takeaways on the state of the race, from PERE's 2021 ESG report.

    It is crystal clear that all matters ESG-related are now top of mind for all key stakeholders – developers, tenants, institutional capital and investment and asset managers alike. Improving sustainability performance across portfolios is absolutely the priority.

    That is underlined by this year’s GRESB scores, which show the asset class has taken another big leap forward in the past year. The total average regional score for standing investments has increased from 70 in 2020 to 73 this year. Property sector scores mirror that – 73 in 2021, up from 70 in 2020.

    Entities participating in the assessment also increased by 24 percent from 2020, the largest annual growth to date. And according to GRESB’s director, real estate Charles van Thiel, the data they are reporting is deeper than ever, with firms going the extra mile to have that data verified by independent third parties. “This means better data in the assessments and an important signal for capital markets that managers are tackling the persistent concerns around data quality,” says van Thiel.

    Race to net zero

    Decarbonization is the world’s single biggest agenda item as the target date of 2050 edges ever closer. But getting there is also the biggest challenge facing every business sector, real estate included. It is a figure PERE has highlighted before, but it is worth restating: the sector is estimated to contribute over 30 percent of global CO2 emissions. That is a sizable chunk.

    So, the overhaul required – and let’s face it, in a relatively short timeframe – to buildings and the surrounding infrastructure in our cities and towns to deliver greener energy, better insulation and cleaner construction methods, to cite just a few things, is in all likelihood going to be an eye-wateringly huge and expensive exercise for owners. “It will take a massive effort,” warns MSCI’s global head of real estate solutions research Will Robson. But, says Hines’ global head of ESG, Peter Epping: “They don’t have a choice.”

    Social mindfulness

    Decarbonization may be top priority right now, but sustainability is, of course, multifaceted. More and more investors and asset managers are acknowledging their duty to make a wider social impact. That comes in many guises – supporting diversity and inclusion at the firm level and across portfolio companies, committing to job creation in local areas where assets are being developed, ensuring affordable homes are being built and that buildings protect the health and wellbeing of their users.

    Data reported by the Center for Active Design, which operates the Fitwel certification system, shows a sector increasingly eager to demonstrate its healthy building credentials – the number of certified properties has grown every year since the system launched in 2017, with 2021 projected to see a growth of 248 percent, the biggest increase to date.

    Property ownership is no longer just about chasing profit, but serving the needs of tenants and the wider community.

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    Amount committed to ESG bond funds between January and May 2021, according to Morningstar data, compared with $68bn in all of 2020


    Predicted value of European ESG private assets by 2025, up from €253bn in 2020 (PwC’s EU Private Markets: ESG Reboot report)


    Investors that cite return on investment as a reason for investing in healthy buildings, according to a report by The Center for Active Design, BentallGreenOak and the United Nations


    Managers that see increasing ethnic minority representation as a top talent management priority in 2021, up from 31% in 2020 (EY’s 2021 Global Private Equity Survey)

    Contributing to the creation of greener, healthier and wealthier communities is, however, increasingly viewed by private capital as a growth opportunity and return enhancer as opposed to a cost burden or penalty. A rapidly growing number of tenants, for instance, will only sign leases if a building ticks ESG boxes. ESG-compliant properties are a demand.

    Sustainable investing is, therefore, an effective market differentiator and, critically, a defense against obsolescence risk and value depreciation. “Companies are going to use [it] as a competitive advantage,” comments Darren Rabenou, head of ESG investment strategies, UBS Asset Management. “We’re observing occupiers paying rental premiums for greener buildings, so the return is increasingly provable,” says Zsolt Kohalmi, global head of real estate and co-CEO at Pictet Alternative Advisors.

    Regulation required

    There is a sense in this report that the private markets have not been waiting around on politicians and regulators leading the way to net zero. Most managers and investors are taking the initiative themselves without regulatory prompting. Nevertheless, clearer regulatory parameters and consistency across markets would be a welcome development.
    “Clear ESG rules are needed, because if you’re building long-term assets, you need a reliable future,” says UBS’s Rabenou.

    And Panattoni’s head of capital markets, Artur Mokrzycki believes it will allow the sector to “work in the same direction and at the same speed to meet common goals.” At the moment, it is accepted that Europe is leading the way on ESG regulation.

    Prove it

    The eyes are the window into a person’s soul, so the saying goes. For investment and asset managers, it is data that reveals the true extent of their ESG performance and allows stakeholders – institutional capital and tenants – to make informed decisions. It can also inform managers of risks in their portfolio and where ESG-related enhancements are required.

    “We need measurable goals across ESG,” says UBS’s Rabenou, who argues that reliable metrics can also counteract accusations of greenwashing. Happily, advances in technology are beginning to make it easier to collect to data and track ESG performance. Nevertheless, there are calls for global standardization of industry ESG metrics, particularly on the ‘S’ factors.

    Make it pay

    Private fund managers wax lyrical about their collective commitment to sustainability and playing a part in reversing the looming climate catastrophe via the investments they make. But another route to demonstrating loyalty to the cause is by incentivizing positive change through directly linking ESG performance to compensation. The idea is gaining traction. And those brave enough to make the first move could well make themselves more attractive both to capital and the best talent in the market. “Now is the time to adopt a new mindset around compensation,” says Nicholas Sehmer, director, private equity and asset management at Sheffield Haworth.

    They said it: Expert musings on sustainability

    “We must act decisively to transform our economies to get to a net-zero emissions state fast enough”

    Peter Epping, global head of ESG, Hines


    “There’s a real possibility that ESG evolves into its own asset class”

    Darren Rabenou, head of ESG investment strategies, UBS Asset Management


    “The private sector cannot wait for regulators to formulate the perfect [ESG] roadmap – there is no perfect roadmap”

    Dean Alborough, head of ESG, Old Mutual Alternative Investments


    “When a tenant comes into town and looks for a space to rent, it’s likely to favor one with the highest ESG rating”

    Stéphane Villemain, vice-president, corporate social responsibility, Ivanhoé Cambridge


    “If the pandemic has made one thing clear, it’s that the social aspect is something that can be supported by the investment manager”

    Erwin Drenth, director, Dutch healthcare investments, Bouwinvest


    “Access to data is essential to making informed decisions [and] thinking strategically about the physical impact of climate change on assets ”

    Maximilian Kufer, head of ESG, private markets, Invesco


    “ Real estate owners have an obvious role to play in delivering socially useful buildings, such as affordable housing ”

    Abigail Dean, global head of strategic insights, Nuveen Real Estate