July 12, 2022
Written by Jessica Pilz, Global Head of ESG
Over the past few years, we have experienced an evolution in the importance of Environmental, Social and Governance (“ESG”) issues, both across the wider business community and society as a whole. Once perceived as a ‘nice to have’, ESG has swiftly transitioned to the forefront and is now considered essential to business and investment strategies. The pace at which regulations have evolved and emerged, as well as the level of expectation from the investment community, has left many scrambling to find the right answers and to build the right strategies.
The real estate sector has made tremendous strides in tackling its contribution to the crisis, more so than many other asset classes. This fundamental shift in attitude can be attributed to a combination of factors, including the climate warnings issued by the Intergovernmental Panel on Climate Change (“IPCC”); the ambitions set out by the Paris Agreement; the introduction of new regulation by governments; investor pressure; occupier demands; and even the global COVID pandemic, which brought the importance of health and wellbeing starkly into focus. But despite efforts made so far, there is still a significant amount of work to be done, particularly given real estate’s 40% contribution toward global carbon emissions.
The rise in attention being given to ESG and its underlying key themes, such as Net Zero Carbon (“NZC”), social impact value and physical climate risk, has led to an unprecedented number of regulations, frameworks and industry bodies. Whilst the intention behind all these has been well meaning, the sheer number and level of understanding required for each has left even the most experienced of ESG professionals in a spin. Unfortunately, the result of this has led to many real estate asset managers and owners claiming to have met certain thresholds and standards, when in fact they have misunderstood the purpose of the regulations. Sustainable Finance Disclosures Regulation (“SFDR”) is a classic example of this – where a disclosures regulation originally intended to prevent greenwashing has been misused as a product label for a strategy.
So, how do investors understand whether their chosen or prospective manager truly understands ESG and how to integrate its increasingly important themes into risk processes and investment decisions?
For many years, investors have relied on GRESB to inform this analysis. Whilst a brilliant platform for raising the profile of ESG within the real estate sector, it is now widely believed by many in the industry that it needs a radical transformation if it is going to keep up with growing investor requirements and demands. Investors are increasingly looking for greater granularity when it comes to ESG reporting, as well as detailed information on governance and integration.
At Fiera Real Estate, we believe that ESG sits alongside all other investment drivers. We don’t believe that it’s one or the other. There was a time when ESG was merely a tick box exercise but given the widespread acceptance of its impact on performance and long-term value, its level of importance now sits firmly alongside financial performance. A manager that recognises this should be able to demonstrate how ESG is integrated into each part of its business, from operation to portfolio management. The easiest way to identify this is through robust governance processes, as well as clear buy-in from senior leadership. Many ESG professionals in the market have identified the importance of governance and have aptly suggested that the ‘G’ should sit in front of the ‘E’ and ‘S’, though unfortunately this doesn’t have quite the same ring to it. Strong governance, which clearly defines roles, responsibilities and processes, as well as support from the top, is critical for delivering meaningful change. In addition to good governance, managers should have access to dedicated ESG resources, whether internal or external. ESG has evolved so rapidly that specialist knowledge and expertise is essential for ensuring it is not treated as an ‘add-on’, as well as to prevent any greenwashing.
Managers should also be able to regularly communicate their ESG performance and progress with their investors. This requires access to and the management of ‘investment-grade’ ESG data, which is commonly cited as one of the most challenging facets of ESG, particularly when it comes to obtaining tenant utility data. Good quality, accurate data at an asset level is fundamental when it comes to ESG. Without this data, one is reliant on benchmarks and estimates – neither of which tell the true story, especially when it comes to decarbonisation. Managers should be investing in data, as well as data platforms. Not only will this allow them to better manage their portfolio in terms of delivering change, but it will open the communication lines with investors and contribute to the industry’s broader move toward transparency.
By way of example, to go on a NZC journey you need to understand where you are starting from to gauge the distance to be travelled and a realistic end point. It is this baseline data which must inform that process and allows a manager to fire the starting gun as we have recently done when setting our 2035 NZC target for the Fiera Real Estate long income strategy.
The rise of disclosure and classification regulations like SFDR, EU Taxonomy and the FCA’s Sustainability Disclosure Requirements (“SDR”) has left many concerned over the risk of greenwashing. Unfortunately, this risk is high. But perhaps this needn’t be a concern. Those asset managers and owners playing by the rules now will ultimately reap the reward in the future. They have the foresight to see where this is all going and are taking the steps to actively ensure their portfolios are resilient and fit for purpose in the future. At Fiera Real Estate, we see this as our fiduciary duty – to be good stewards of our investors’ capital. There is so much noise surrounding ESG that it does become hard to know what to filter out and where to focus, but if you manage to identify what’s most important, it is simpler than it seems.