At the end of an extraordinary year of heightened demand in environmental, social & governance (ESG) investments across numerous asset classes, opportunities for long-term, sustainable investing in the real estate management industry are now becoming a bigger focus. 
The unprecedented extent of wildfires, floods, hurricanes and typhoons in 2018 have sparked greater concern about the effects of climate change and how policy makers are addressing it, and this growing mind-set is in turn driving an increasing number of real estate investors to ask how their capital can make an impact towards a more sustainable global economy. Is it a fad or could it be the new norm in the property markets?
Capitalising on the real estate opportunity
In today’s changing investment landscape, the real estate industry has been integrating sustainability throughout the investment life cycle. Major developers, architects, property companies and investment managers are capitalising on the opportunity that this creates to design and develop fully sustainable places and buildings, using SMART building technology, sustainable building materials and renewable energy. For example, the new TwentyTwo office tower currently under construction at 22 Bishopsgate in the City of London will include 1.4 million square feet of mixed use space, including bike hire facilities, a wellness spa, climbing wall and food hall, as well as dedicated co-working office and community spaces all designed to enhance the staff’s health and wellbeing. Advanced SMART technology will also be used throughout the building to maximise the most efficient use of space and track energy efficiency.
ESG data is a double-edged sword
Several hurdles exist and investors and regulators alike are hungry for more company disclosures of ESG information. Despite huge advances in data analytics and AI there is a considerable lack of quality historical data on ESG. Legacy property assets in managers’ portfolios, which do not have the necessary sustainability requirements, pose big challenges too.
On a bullish note, great strides have been made to improve data transparency and benchmarking capabilities, with 903 real estate entities representing $3.6trn in gross asset value globally being assessed and rated in the Global Real Estate Sustainability Benchmark (GRESB) ESG Index in 2018. This is an impressive increase from less than 200 participants in 2010. International organisations, such as INREV, are also increasing awareness and transparency by introducing ESG guidelines for investors, while partnerships such as the Better Buildings Partnership, a collaboration of the UK’s leading commercial property owners, are also working together to improve the sustainability of existing property stock.
Despite all these initiatives, there is not enough quality research and proven quantitative evidence on the correlation between property assets with high sustainability ratings and their performances. Nor is there enough solid evidence as to whether a ‘green’ premium in rents can be charged to occupiers for buildings with higher ESG ratings or whether ‘non-sustainable’ buildings depreciate at a faster rate. Additional ESG impact studies and analyses need to be carried out and dedicated specialist research born so the industry can address growing requirements from investors, such as how to measure and include ‘softer’ social and governance factors.
Real estate’s momentum
Despite these challenges, it is clear that the real estate investment industry is on the cusp of a major wave of structural ESG investing. Increasing economic, demographic, technological and environmental mega-trends will accelerate this. Social aspects such as health & wellbeing, as well as the need to better manage corporate governance risk, are also playing a bigger role in ESG considerations and will start to be introduced in global sustainability benchmarks. The real estate industry will adapt as the discipline itself evolves and new investment opportunities are created.
Last but not least adopting a fully integrated real estate ESG strategy is the only a way to ‘future-proof’ our buildings to make them more sustainable and resilient. Advocating best practice for health and wellbeing of occupiers and staff, as well as promoting greater equality, diversity & inclusion in our industry will ultimately improve bottom lines as well as produce better outcomes for investors.
Joanna Turner is head of property research at Canada Life Investments. The views expressed above are her own and should not be taken as investment advice.