New survey results highlight how prominent global real estate players are gauging their ability to withstand the physical and economic fallout of climate change through an environmental, social and governance (ESG) lens. The Real Property Association of Canada (REALPAC) and Bentall Kennedy jointly produced the snapshot, released in late March, of 44 institutional investors, property fund and asset managers that collectively hold USD $1.1 trillion worth of real estate worldwide.

Findings — meant to inform the United Nations Environment Programme’s Property Working Group (PWG) — reveal that a significant majority of participants scrutinize greenhouse gas (GHG) emissions, energy and water efficiency, and waste reduction efforts within their portfolios. ESG provides a framework to set priorities, steer action and monitor progress toward more resilient assets, with 93 per cent reporting that criteria linked to sustainability, supporting local communities and shunning corruption influence their investment decisions.

“It shows the vast majority of respondents are taking ESG considerations into account for acquisitions and using ESG as a lever to lower risk, and that tenants and owners are presently asking and expected to demand more from asset managers to address climate risk,” Eric Usher, head of the UNEP Finance Initiative, observes in a foreword to the survey results and associated analysis.

Ninety-one per cent of participants now formally disclose their efforts through mechanisms such as GRESB, Principles for Responsible Investment (PRI) or the Global Reporting Initiative (GRI). Deadlines have been set to achieve a specified level of GHG emission reductions in 59 per cent of the surveyed portfolios and 78 per cent are engaged in building-level collaboration with tenants aimed at lowering carbon footprints.

ESG criteria are increasingly aligned with return on investment and risk management — as 85 per cent of survey respondents self-identify as “highly or very highly motivated” to use ESG for its stabilizing outcomes, which can variously help reduce operating costs, enhance building value, retain tenants, control insurance premiums, avoid stranded assets and/or ensure regulatory compliance. Respondents also report that investors and tenants are demanding more proof that efforts have been made to minimize real estate’s environmental footprint, and that owners/managers are conducting business in a socially responsible way.

Among 18 North American representatives — accounting for USD $468 billion worth of assets under management or 43 per cent of the capital value of the survey base — are Canada’s Alberta Investment Management Corporation (AIMCo), Bentall Kennedy, Healthcare of Ontario Pension Plan (HOOPP), Ivanhoé Cambridge, OPTrust, Oxford Properties, QuadReal Property Group and Triovest Realty Advisors. Fourteen respondents based in Europe and 12 in Asia-Pacific joined them in sharing perceptions on ESG’s role in navigating climate volatility and facilitating the transition to low-carbon practices.

The survey follows the winter 2016 launch of PWG’s Sustainable Real Estate Investment Framework. It provided guidance for developing a climate-related ESG strategy, integrating it into investment activities, then measuring and benchmarking the resulting financial value — with templates for three distinct user groups: institutional asset owners, trustees and investment advisors; direct real estate; and real estate equity, REITs, bond and debt investors.

“The results from this survey reflect a rising global awareness of the financial merits of sustainable investing as a means of risk mitigation and long-term value creation,” maintains Anna Murray, vice president, sustainability, at Bentall Kennedy.

“Real estate investors and fund asset managers have an incredible opportunity to move to the forefront of sustainable investing and management by reducing the industry’s overall footprint,” concurs REALPAC’s chief executive officer, Michael Brooks.

Continental variances

Results, drawn from data collected in the fall of 2018, show both global consistencies and some continental variances. North American participants unanimously employ the big-four sustainability indicators — energy and water consumption, GHG emissions and waste generation — to measure portfolio performance, while Europeans trail the global average for measuring waste generation and Asia-Pacific participants exceed the global average for measuring indoor environmental quality.

All European respondents — with collectively USD $354 billion in assets under management — confirm they have strategies in place to address energy use and GHG emissions, while a smaller majority targets water consumption (86 per cent) and waste (71 per cent). All Asia-Pacific respondents — representing USD $280 billion in assets under management — have strategies to address energy and water consumption, waste generation, and human health and well-being. North American and European respondents are somewhat less focused on the latter.

Across the board, policies and actions related to embedded carbon in building materials and biodiversity are still gaining traction. Globally, 63 per cent of respondents identify the GHG footprint of materials as an issue of concern and 45 per cent say the same of biodiversity, but the percentage of respondents employing targeted indicators within their portfolios drops below 30 per cent. Thus far, Asia-Pacific leads and North America lags in both efforts.

All respondents in Asia-Pacific have embedded two ESG criteria into their acquisition strategies to routinely assess the GHG emissions and benchmarked sustainability rating of any potential new asset. In contrast, only a 47 per cent minority of North American participants include GHG emissions on their acquisition checklist and nearly one-quarter (24 per cent) do not weigh sustainability ratings.

Asia-Pacific participants unanimously report growing demand from investors to disclose sustainability performance, yet have the lowest adoption rate, at 83 per cent, of formal sustainability disclosure frameworks. All European participants report via a sustainability disclosure framework, as do 89 per cent of North American respondents — rates that currently supersede investors’ expectations since 86 per cent of European and 71 per cent of North American respondents report they’ve faced growing demand to disclose sustainability performance.

Survey participants suggest parallel initiatives such as the Task Force on Climate-related Financial Disclosures — which 15 per cent of survey respondents have already adopted — are bolstering ESG’s profile. So, too, is Mother Nature.

“Respondents also mentioned that the physical risks to real estate assets of climate-related loss from extreme weather events have also sharpened investor focus,” the report notes. Meanwhile, Michael Brooks sees four underpinning reasons.

“First, the business case is incontrovertible. Second, the expectations from stakeholders, including investors and tenants, will only increase. Third, the pressure from regulators and government will continue to rise. Lastly, it’s the right thing for all corporations to do for their brand, their communities and their continuing social license,” he submits.