Why it makes sense to have a targeted approach.
Environmental, social and governance (ESG) is a high priority for real estate investors. Affording significant weight to ESG within investment decisions is prudent regardless of whether an investor has altruistic or financial motivations, given that ESG-based strategies deliver superior long-term capital protection, creation and growth.
Ensuring assets are energy efficient and adaptable without extensive refurbishment, for example, improves environmental outcomes as well as occupier appeal through lower energy costs/branding benefits and enhances landlord optionality. This will be reflected in higher rents and lower yields. Safeguarding social inclusivity increases commercial asset value and aids its social contribution. Communicating and collaborating with councils, landlords and local communities both promotes better governance and ensures assets are more ingrained in its micro-location and is accretive to long-term value.
ESG and financial performance are thus inseparable. Therefore, ESG considerations should permeate every facet of investment strategy from macro-sector allocations though asset selection and management to occupier profile. What this means in practice varies by investor, but there are three general tenets that can be applied.
The first tenet is that ESG strategies should be inclusive at all levels. The UN Principles for Responsible Investment (UNPRI) was created to guide institutional investors in developing a more sustainable global financial system. Interpreting this guidance, it is unequivocal that it is not the role of real estate investors to deprive any business or sector with access to the modern, well-specified floorspace they require to operate efficiently.
This means that all investable options should still be on the table for ESG-focused investors, including negatively perceived occupiers such as fossil fuel companies or power-hungry data centre operators. Indeed, excluding such occupiers may worsen ESG outcomes if they are forced to occupy poorer quality buildings, use inferior locations or their higher cost base limits as capital available to the investor isn’t a greener or more socially inclusive operational process.
