Click here to read the full paper including graphs: LGC article – Hannah Marshall and Aleksandra Njagulj
An intractable problem?
Society is increasingly coming to grips with the scale of the environmental challenges facing the planet and the urgent need for change. This is prompting increasing focus from consumers, companies and governments on environmental, social and governance (ESG) factors in every facet of public and private life. But the very scale of
the challenge can make it difficult to know where to start in tackling such a vast issue. One overlooked lever for ESG impact is real estate. From the homes we live in to the factories that produce our goods and the offices that house workers, the built environment contributes 40% of carbon emissions. Given that people can spend
between 80-90% of their time indoors, the built environment also has an enormous impact on the health and
wellbeing of our communities. The ability to make a positive contribution to ESG factors through property ownership can be underestimated. ESG factors can have a profound effect on the investment performance of an asset. At CBRE Global Investors, we take a different approach to ESG, seeing it not as a compliance issue to avoid. Instead, it’s a central tenet of how we add value across every stage of the investment lifecycle, creating a shared advantage for clients while contributing to society as a whole.
There are many ways real estate investors can contribute to sustainability through the management of their properties. It is possible to upgrade buildings to minimise their environmental footprint in simple ways, such as installing smart meters and energy-efficient lightbulbs or implementing waste management programmes. Meanwhile, improving facilities to provide gyms or cycle stores, or renovating to improve the light and space, can have a huge impact on wellbeing and social factors. However, ESG issues can sometimes be pushed to the bottom of the agenda in real estate due to confusion over whose responsibility they are. Landlords can feel it’s not appropriate to pry into their tenants’ operations, while some tenants deflect responsibility of a building’s ESG performance to their landlords. Green leases can help address this confusion by including clauses that define the responsibilities of the owner and tenant with regard to sustainability. They formalise a collaborative approach to monitoring, managing and improving the environmental impact of a building. With very long lease terms prevalent in some real estate sectors, landlords may believe their next opportunity to include green lease clauses is many years away, but often proactive engagement with tenants leads to an agreement on common sustainability goals.
A growing urgency to act
Unfortunately, delays in addressing ESG matters pose a significant, and imminent, risk to the investment performance of a property. Just as investors face pressure to meet tightening government regulations around ESG issues, their tenants face that same pressure. In coming years, buildings that underperform on ESG factors will attract a smaller pool of potential tenants and achieve lower rents. In addition, buildings with poor ESG performance could face significant discounting, or even obsolescence, when they are eventually sold. Tenants are increasingly looking for modern, smart buildings, not box-like offices with rows and rows of desks. Buildings that can offer the environment tenants desire, alongside the ESG performance they expect, will have a competitive advantage in the rental market. These expectations are likely to increase in the coming years, so it will only become more pressing to address ESG issues before they impact the value of an asset.
A tapestry of issues
ESG issues are interdependent, and efforts to address them from a holistic view are the most successful. For example, a programme to upgrade the windows of an office building might address the ‘E’ factor by reducing emissions, it could contribute to the ‘S’ factor by introducing more natural light and acoustic insulation (making it a more pleasant and productive workplace), and it will overlap with ‘G’ issues by helping both the owner and tenant meet their carbon reduction commitments. Even with growing focus from the public in recent years, ‘G’ factors can be viewed as a black and white issue of being compliant or not. Owners will need to look ahead and adapt to stay compliant as regulations change and tenant expectations rise. All ESG factors are set to become more influential as we transition to a green economy.
Leading in ESG
At CBRE Global Investors, we put ESG at the centre of our investment process. We live and breathe it every day. We believe that understanding and managing ESG factors at every stage of the property lifecycle is one of the drivers of investment’s outperformance. Our proactive approach ensures we work closely with tenants and landlords to help them reach their ESG objectives. Through green leases, on-site sustainability workshops, tenant fitout guidance and b2b collaboration, we help futureproof property investments and build mutually beneficial relationships with tenants over the long term. We can also provide look-through reporting for our clients, to monitor progress against bespoke ESG targets. For LGPS organisations looking to demonstrate their commitment to ESG values, property investment provides an effective way to make a tangible, measurable contribution to sustainability.