Investing in ESG pays off | Overview
Last year, 505 European ESG funds were launched, while at the end of December, there was an 84% quarter-on-quarter increase in sustainable European funds.
Investors vote with their feet, or rather their pockets, and real estate investors, managers and occupiers would be foolish to ignore the dynamics of ESG and impact investing. Real estate industry stakeholders are now expected to be more aware of the impact of their activities on climate and communities as the industry navigates a net zero carbon path.
One area that appears to be gaining traction with investors, including pension funds, is local impact lending. Investors are often willing to lend to local developers where traditional banks will not, allowing the private sector to come up with commercial and residential projects.
These investors / lenders do not just focus on financial gains and look to other key performance indicators, which may include: job creation and the provision of apprenticeships; regeneration of brownfields; rehabilitation of obsolete buildings; create energy efficient buildings; and invest in the public domain or in education.
By acting as a “lender of last resort”, investors can generate an acceptable level of return to meet their fiduciary responsibilities, while having a measurable positive impact on their local areas.
Managers and occupants would be foolish to ignore the dynamics of ESG investing
It is possible to negotiate green loans to provide additional incentives for developers. Given the generally short duration of these loans, investors’ equity can be recycled and redeployed three or four times over a 10-year period.
In a post-Covid-19 landscape, many parts of the UK could increasingly depend on local impact loans to improve city centers, where there is likely to be an oversupply of retail businesses, and to improve the viability of less economically robust residential projects.
There has been a notable increase in the measurement of ESG and social impact over the past decade. It is undoubtedly easier to measure the effect of the environmental impact of owners or tenants than to measure their social impact, because the consequences are more empirically measurable.
But in recent years, there have been significant improvements in the way we can measure and monetize the more subjective social impacts of real estate ownership or occupancy.
Investors and occupiers are increasingly demanding and hold their advisers and managers accountable to higher standards. It is very encouraging to see the number of institutional fund managers who have made firm zero carbon commitments over the past 12 months. As property managers, we will need to be able to demonstrate our commitment to ESG and social impact to win new business or retain our clients. Most new clients already insist that an advisor has a responsible investment policy and can demonstrate the climate and social impact of their strategies before being shortlisted for mandates.
The message of the massive volume of sustainable investment in Europe in Q4 2020 – accounting for 80% of the $ 152.3 billion (£ 109.4 billion) global influx of ESG funds, according to Morningstar – is straightforward . Get with the program or exit the game.
Graeme Rutter heads up CBRE’s investment advisory team