With societal impact and sustainability weighing on the minds of many these days, environmental, social, and governance (ESG) factors are having an appreciable impact on the real estate business, much like the rest of the asset management industry. Our survey attempted to get a sense of the seriousness with which these issues are being addressed. The results indicated that the concern is more than talk: Among investors, 46% have passed on specific opportunities due to ESG concerns over the project or partners involved.
As seen in other parts of the industry, European investors are more likely to draw a line in the sand: 57% of European investors have turned down investment opportunities, compared to 33% of their North American counterparts.
Some are quick to add a caveat. An interviewee at a several hundred billion dollar sovereign wealth fund stated, “In terms of ESG, I wouldn’t say there’s been a massive shift in investors going out of their way to make a positive impact, despite. The optics some companies cultivate. Hopefully we’ll see a cultural shift, but the changes are incremental though generally in the right direction. I just don’t see it as a massive factor in the decision-making of most companies on the investment level at the moment.”
The growing emphasis on ESG is more pronounced among fund managers, where 56% say they have turned away otherwise attractive investments on ESG grounds. That figure rises to 69% of managers based in Europe, compared to only 51% of North American firms. Even firms that haven’t yet found themselves in this situation are not likely to be cavalier about such a decision, with only 16% saying it is unlikely they would turn down an opportunity if the economics of a deal were otherwise favorable (Figure 9).
More than a third of all investors claim that past performance on ESG is not factored into their decision to hire managers (Figure 10). Another 16% say they have no framework in place to formally assess the ESG performance of real estate managers, despite using them in other asset classes. One out of 4 has developed a formal internal framework for assessing prospective managers’ performance on ESG-related issues. A similar proportion either applies externally developed frameworks or relies on consultants and external advisers to assess prospective manager’s performance on ESG-related issues.
ESG can be perplexing, even for firms that are confident in their own principles and processes. Gerstenlauer suggests that a “lack of uniform measurements and standards makes some of the discourse around this topic more confusing and less impactful than the movement could be.” The development of clear standards and accountability may have the added benefit of reducing some of the inevitable lip service that is paid to ESG concepts. Fund managers are in a good position to amplify the effects of their own ESG policies by encouraging their borrowers to also focus on sustainability and other practices that benefit society. An Asian-based investor points out, “If ESG mandates become more widely adopted among institutional investors and that affordable housing investments are recognized as fulfilling the ‘socially responsible’ element, expertise in making such investments may become a sought-after criteria in managers.”
ESG investing in the real estate sector could evolve quickly. Many managers may currently limit their ESG activities to screening assets, but that is likely to change in coming years if broader industry trends are any indication. Private equity and mutual fund managers are responding to strong market demand with more intentionally constructed portfolios and, in some cases, greater engagement with company management. In what may be the purest variant of ESG investing, a growing number of managers are launching impact funds dedicated to addressing various social or environmental ills.9 Given the vast potential to make a difference by thoughtfully designing and developing public and private spaces, it is easy to envision a growing number of real estate impact funds being brought to market.
“ESG can be perplexing, even for firms that are confident in their own principles and processes.”Read the next section
9 “KKR collects $1.3B for impact fund,” PitchBook, February 13, 2020.
This information is provided for education purposes only and is not intended to provide legal or investment advice. SEI does not claim responsibility for the accuracy or reliability of the data provided. Information provided by SEI Global Services, Inc.