Commercial real estate is jumping after sustainable investment
INSIGHT ARTICLE |
Increasingly, real estate investors are seeking out projects that not only show strong returns, but that also have a positive impact. Green buildings and developments that promote strong neighborhoods and good jobs are at the top of investors’ lists, and the projects that do good for the community and the planet are more and more becoming the projects that are good for business.
The field of environmental, social and corporate governance (ESG) has emerged to help companies make good on investors’ wishes to use their capital responsibly. But the industry is still searching for metrics to accurately measure and report ESG initiatives. Without that framework, both ESG funds and the goals they hope to achieve could be stunted.
“Real estate companies want to show investors that they are committed to social and environmental sustainability, but they don’t know the best way to highlight it,” RSM senior manager Laura Dietzel said. “The field is crowded with metrics, which makes it extremely difficult for investors to compare projects side-by-side.”
For real estate investment trusts and other investment vehicles in real estate, the largest ESG concern is environmental sustainability. Commercial buildings are responsible for 39 percent of greenhouse gas emissions in the United States, and as investors become more conscious of the effects their money can have on the environment, they are looking for funds that invest in projects that promote efficiency in terms of waste, water and energy, as well as low impact on their immediate environments, Dietzel said.
Portfolios are only too happy to work with these sustainable projects. Green residential buildings in the United States are able to charge 9 percent premiums on top of their competitors, while green office buildings can charge a whopping 26 percent more.
But the landscape of environmental ratings systems for real estate is fractured. Competing standards like LEED, BREEAM and NABERS all rate commercial buildings’ environmental impact in different ways. And beyond environmental impact, ESG metrics only become fuzzier.
“Portfolio managers might advertise that they only invest in projects that create jobs, or revitalize neighborhoods or promote gender diversity on their boards,” said RSM partner Anthony DeCandido. “Some of these claims are difficult to measure. And since it’s up to the funds or the companies themselves to self-report these metrics, investors could be getting a fairly biased view.”
A few generalized standards for sustainability have cropped up. The Global Real Estate Sustainability Benchmark assesses the sustainability of real estate portfolios, while the Sustainable Accounting Standards Board is working to spread a single set of ESG standards. But DeCandido said these metrics are slow to catch on, and that boiling down the entirety of ESG to a single grade is difficult.
So, investors face a jumbled landscape of funds and trusts purporting to be sustainable, but lack the hard metrics they need to make informed decisions. Conversely, real estate funds that have made ESG investments may appear to be no different from funds that simply pull a few statistics to impress younger investors, Dietzel said.
Dietzel and DeCandido added that their clients have been asking for guidance on how to connect with today’s more responsible investors, and that RSM would be hosting an upcoming webcast on how to share and showcase ESG practices.
“Since investors today are requiring more and more transparency, there is real accretive value for businesses to strategically share their ESG practices,” DeCandido said. “And yet, there is a lack of consensus on how to do that among the asset management community.”
DeCandido added that if a fund really is committed to the ESG initiative, it’s in the fund’s best interest to support third-party verification and ensure that due diligence is strong enough to unearth bad behavior. Fans of ESB should also encourage responsible self-reporting and adoption of the standards the real estate industry does have in place.
How is your fund doing driving its ESG strategy? Attend this complimentary webcast on April 10 to find out more.
Without standardized reporting, it’s difficult to track environmental, social and governance performance in middle market companies.
Report explores corporate social responsibility, diversity and inclusion in the middle market and the value of formalized planning.