What are the key issues to integrate into ESG strategies?
The real assets sector (real estate and infrastructure) has certain ESG advantages and challenges compared to the equity and fixed income investment universes. In many cases, investors are majority owners or own the asset outright. Majority or wholly owned holdings offer investors much greater control over the definition, implementation and reporting of ESG data alongside or outside of existing reporting standards, such as GRI ( Global Reporting Initiative).
What are the key issues to integrate into ESG strategies?
Critical aspects in the Environmental part (M)
Focus on energy inefficiency / Net Zero
While carbon reduction efforts may not necessarily generate higher immediate returns on investment, they will play a prominent role in preserving asset values as occupants increasingly move away from buildings with poor environmental performance. As occupiers and investors are attracted to more sustainable properties, these assets will be worth more.
Buildings have a significant carbon footprint. An integrated ESG vision can include reducing the carbon footprint through building with more efficient materials and standards. and therefore reducing the risk of carbon price impacts or savings from energy efficiency.
Sustainability certifications such as LEED or BREEAM are and will continue to be important benchmarks for the environmental performance of buildings, although the focus is now also including initiatives such as the Net Zero Carbon Buildings Commitment, of the World Green Building Council (WGBC), which requires all buildings to have net zero carbon emissions by 2050. Other initiatives with this approach include LEED Zero, Zero Carbon del International Living Building Future, y EDGE Zero.
Green leases’ between landlords and tenants to meet certain environmental targets will become a more and more common tool for investors to monitor and drive the environmental performance of their real estate assets. Metrics may include electricity consumption per occupant (kilowatt hours per employee), water used per area and the volume of waste going to landfill as a percentage of total waste produced.
Sustainability premium with more and more evidence
As reporting standards and data for real assets improve, investors must work towards a stronger link between ESG strategy considerations and their financial implications. An important advantage of real assets over other asset classes in the investment universe is the potential for a sustainability premium in real estate. A growing number of studies point to the existence of a sustainability premium in the real estate sector. sustainability premium (establishing the correlation between sustainable certifications such as LEED or energy efficiency level according to the EPC, and parameters such as sales price or rental yields), for both the commercial and residential segments. This sustainability premium can help to more accurately assess and understand the risks and implications of ESG strategies in the real estate market.
Green buildings will command higher rents and higher capital values, while incurring lower operating and maintenance costs.
Increased resilience through effective risk and cost management
Most of the risks faced by the built environment are climate-related, as extreme weather conditions often cause significant damage to properties.
Investors with significant real estate exposure are increasingly leveraging the analytical modelling capabilities and historical data sets of insurance companies to understand weather risk in general and climate risk more specifically.
Munich Reone of the world’s largest reinsurers, produces climate risk assessments that model potential property impact scenarios based on a broad set of twelve types of natural hazards: earthquakes, volcanic eruptions, tsunamis, tropical cyclones, extratropical storms, hail, tornadoes, lightning, wildfires, river floods, flash floods, and storm surges.
A joint study by Munich Re and PGGM,the Dutch pension fund, the Dutch pension fund, applies these analyses to PGGM’s real estate.
Climate risk
A climate risk profile based on more than 100 years of weather and hazard event data is able to examine the climate risk of a global and diversified real estate portfolio in different dimensions, from hazard risk factor exposure by country and city to, ultimately, risk at the individual property level.
As climate change risks rise, costs increase: Global property insurance premiums have surged in the past two years as real estate portfolios suffer physical damage from natural disasters.
Climate change is also contributing to higher operating costs, due among other things to more expensive energy production. Extreme heat in many countries is driving demand for air conditioning and increasing the operating costs of buildings.
Consequences of climate risks
The long-term consequences of climate-related risks include political and technological changes that may reduce the investment attractiveness of a given asset type or sector. Older assets are particularly vulnerable, with poor energy efficiency leading to a higher discount or risk premium in the values of these properties.
Investors seeking to improve risk and cost management and strengthen resilience should identify their portfolio’s exposure to climate-related risks and take steps to address vulnerabilities in each asset. MSCI’s Climate VaR index is a measurement tool that allows investors to quantify the potential impact of climate change. The tool estimates the potential financial costs to property owners due to climate change, both physical risk (damage from increased extreme weather events) and transition risks (reputational cost or cost of reducing future carbon emissions).
Critical aspects of the social part
Health and wellbeing, putting people at the centre
The COVID pandemic has led to an increased demand for health and wellness features in the workplace by office occupants. The ventilation and filtration air The right kind of health and safety measures are emerging as a key approach, not only to prevent the spread of viruses but also to increase the energy levels and general mental health of employees. Elements being worked on in this regard include higher ceilings for better air circulation, allocation of more space area per person and measurement of air flow and renewal rates, or gas concentration measurements.
The pandemic has also increased the awareness of Hygiene, This has led owners and managers of facilities to undertake a more intensive and regular cleaning; providing protective products such as antiseptic hand gel, disinfectant and masks; and installing signage and other information points to advise building occupants on how to maintain cleanliness.
Other measures to improve well-being in the workplace include ensuring a safe and healthy working environment. adequate and preferably natural lighting in workplaces, adequate levels of sound insulation, healthy food choices, exercise opportunities and health and wellness counselling sessions for employees.
Many property owners have chosen to certify their buildings with the WELL Building Standard as a framework to assess and improve well-being in the built environment. WELL, from the International Well Building Institute (IWBI), is the leading standard for buildings and indoor spaces that aim to implement, validate, and measure features that support and promote human health and well-being.
Critical aspects within the Governance (G) component.
Good governance and CSR (Corporate Social Responsibility).
Governance covers topics such as executive compensation, diversity, policies and practices related to preventing corruption, or tax payment.
Corporate Social Responsibility (CSR) is increasingly influencing corporate governance practices and principles. To achieve this, it is essential to create a corporate culture with a shared set of values, enabling a company to support both its employees and the communities in which it operates.
Equity, diversity, and inclusion are key components of governance, as is improving transparency in procedures and decision-making, particularly concerning ESG objectives. Policies such as those related to selection and hiring…
Supplier treatment, tenant engagement, and relationships are also included in this governance category, which prioritizes employee well-being and aims to enhance their workplace experience.
Improvements in Corporate Social Responsibility (CSR) aspects definitely lead to better long-term business performance, making the company more resilient and better equipped to withstand economically challenging times.
Chief Executive Officer of Ineria Management
