Our survey of global real estate investors at the RE-Invest summit at MIPIM in March 2023 revealed a clear trend that organisations are starting to place as much emphasis on impact and sustainability as financial returns in their investment decision making. Only 12 per cent of the audience disagreed with this statement.
Impact and sustainability are becoming as important as financial returns in my organisation’s investment decision making
This is a trend we are seeing across the whole Investment Management sector as Environment, Social, Governance (ESG) factors have become increasingly important to all stakeholders – from investors, regulators, and financiers through to corporate tenants and consumers. For real estate this focus is perhaps even more heightened given how integrated the built environment is with peoples’ everyday lives and its impact on the physical environment. The statistic that the built environment generates nearly 40 per cent of the annual global carbon emissions is frequently cited, and real estate undoubtedly plays a key role across the ESG agenda.
When we examine the drivers for integrating ESG factors into investment decision-making, it is unsurprising to see protecting investment returns and regulation ranked highest by respondents.
Rank the drivers for integrating ESG factors into your investment decision making from 1 (highest) to 5 (lowest).
Much has been talked about the evidence of a green premium for buildings that meet the top sustainability criteria, but a topic that is getting increasing attention is the brown discount (or even obsolescence risk) for buildings that don’t – and the significant proportion of assets that fall into this category, including many currently considered prime. Not only are tenants looking for the best quality buildings that align with their ESG targets and appeal to consumers, but regulations such as the Minimum Energy Efficiency Standards in the UK are also putting pressure on landlords to make improvements. Furthermore, the current economic environment is seeing occupiers placing greater focus on the operating costs of buildings and the savings that can be achieved through higher energy efficiency ratings.
Investors are acutely aware of this shift in expectations, and the risk that their buildings will rapidly decrease in value if they are not brought up to specification. Indeed, some landlords have been willing to take a hit now in order to offload assets that they do not have the capital, expertise, or investment timeframe available to reposition. There will also be buildings, particularly in secondary locations, where the economics do not stack up and the potential uplift in value does not warrant the required investment.
A key challenge is the lack of consistent industry-wide standards for what good looks like, or indeed a tried and tested pathway to get there, in order to accurately account for the capital expenditure required. However, there is unlikely to be the luxury of a wait-and-see approach as we are already seeing ESG factors influencing valuation and pricing adjustments. Financiers are also placing growing emphasis on the ESG credentials of the assets and businesses that they finance, and those without a strategy to address this will find it increasingly challenging to access financing – or at least at attractive rates compared with those that do have a plan.
Interestingly, there is a wide variation in how respondents are prioritising impact and sustainability outcomes, with an almost even split across the rankings. For some investors, this will be a unique selling point, whereas others are focused primarily on protecting risk. This raises the need to ensure alignment on ESG expectations. Not everyone’s priorities are the same and approaches will vary between jurisdictions, organisations, and individuals – as we have seen with the divergence in US and European attitudes. ESG encompasses many different and overlapping factors and investors need to ensure that they are clear on their priorities and that these align with beneficiaries. To address this, we are seeing firms developing ESG investment frameworks to ensure consistent decision-making, as well as clearly articulating ESG principles in any asset manager mandate.
KPMG conducted this survey at the RE-Invest Summit at MIPIM in March 2023. The 60 delegates comprised of global real estate investors from 46 institutions across 20 countries, with combined real estate investment portfolios worth in excess of $800 billion.
If you want to discuss any of these results in more detail, please reach out to Andy Pyle.
