• Thu. Dec 1st, 2022

Putting real estate investments to the ESG test

ByWillie M. Evans

Apr 19, 2022

Karen Clarke-Whistler, director at ESG Global Advisors in Toronto and former environmental director at the Toronto-Dominion Bank, said most major investors in Canada have ESG sustainability teams that see real estate as “a area of ​​opportunity” due to its well-developed development. ESG program and because “sustainable real estate is a very important component of green bonds and some of the new capital market innovations”.

“For commercial real estate, 2022 will be the year ESG moves from ‘what’ to ‘how’, or from ambition to execution,” said Paul Morassutti, vice president of the California real estate firm. CBRE Group. Inc., in the company’s 2022 Canadian Real Estate Market Outlook. “The ambition is a net zero world by 2050 and the execution is to integrate ESG factors with financial factors in the investment process.”

The fact that almost 40% of annual CO2 emissions result from the operation and construction of buildings has spurred changes in real estate and development, with many in the sector committing to adopting practices more durable.

Developers and REITs are among those setting net zero goals for their operations and for new buildings and developments.

For example, Toronto-based Dream Group, which includes several trusts and public real estate companies, did so in November 2021, as did Toronto-based GWL Realty Advisors in January. CBRE made its first commitment to carbon neutrality in 2007.

Montreal-based Ivanhoé Cambridge Inc. has committed to having a carbon-neutral portfolio by 2040. In October 2021, the company announced that it was converting its corporate term loan and line of credit program, valued at $8.5 billion, indexing them to its ESG performance. The firm said this “ambitious initiative” allows the company to align its fundraising activities with its sustainable investing priorities.

Additionally, municipalities such as West Vancouver, British Columbia, and large institutional investors are demanding zero-emissions policies from suppliers and customers. This trend has allowed real estate to become more integrated into investment portfolios that are moving away from fossil fuel investments as investors strive to reduce carbon emissions, said Thomas Mueller, president and chief leadership of the Canada Green Building Council. By investing in real estate, “you can actually invest in carbon reduction and have a return on your investment,” he said.

The environmental component of ESG investing, such as reducing climate risk and carbon emissions, typically receives the most attention. But two years of pandemic have highlighted the importance of social issues in the real estate sector. For example, the link between building design and health and well-being has become evident.

“We say we will achieve excellent financial returns by focusing on social and environmental outcomes,” said Jamie Cooper, portfolio manager of the Dream Impact Fund. “The more sustainable our buildings, the more amenities they have, the more they feel like part of the community, the more desirable it will be to rent space, and we’re going to be busier and hopefully have rents. higher accordingly.

Cooper said there is growing pressure from investment managers, banks and other financing institutions to want their investments to “do more than just earn a financial return.” Members of a teachers’ union, for example, say they want to see the money they invest in their pension plan “be used for good in the community”, he said.

Community engagement is a “huge problem,” Clarke-Whistler acknowledged. Having strong community support “can make or break a development”.

As an investor, Clarke-Whistler said she would “be really interested in tenant satisfaction because that’s the integrator of everything.” Other social factors to measure include workforce diversity, customer engagement, safety management, and community engagement.

Prior to the Covid-19 pandemic, the health and well-being of tenants or occupants focused on features such as fitness classes, bicycle parking, and healthy food options. Health concerns now focus on “more technical features of buildings,” such as ventilation, light, indoor air quality, temperature, and operating procedures such as cleaning protocols, according to the JLL Return on Sustainability white paper, published in January by Jones Lang Lasalle Inc., a Chicago-based real estate company.

Noting that more people coming to the office are concerned about airborne diseases, JLL’s article cites research from the Healthy Building Team at Harvard TH Chan School of Public Health, which found that ‘optimized ventilation can improve productivity by the equivalent of USD 6,500 per person per year.

ESG ratings and benchmarks

A declared commitment to ESG principles is nothing without action. Several third-party rating and assessment organizations provide benchmarks and ratings for fund managers and investors who want to know how companies are performing on the ESG front.

Programs such as BOMA Best Certification for Green Buildings and Leadership in Energy and Environmental Design (LEED) are for individual properties. Institutional investors need more comprehensive firm-wide metrics, drawing on organizations such as the Netherlands-based Global Real Estate Sustainability Benchmark (GRESB), which collects data from funds REITs, property companies, property developers, infrastructure fund managers and asset operators to rank their ESG performance.

GRESB reported a 24% increase in the number of participants in its real estate assessment, to 1,520 global entities (comprising US$5.7 trillion in assets under management) in 2021.

Toronto-based Dream Group uses BlueMark for its third-party ESG audit, according to portfolio manager Jamie Cooper. The San Francisco-based Sustainability Accounting Standards Board (SASB) and S&P Global Ratings are two other organizations that rate the real estate sector.

The International WELL Building Institute and Fitwel are two major New York-based certification bodies that focus on the health and well-being of building occupants. Fitwel recognized Vancouver-based QuadReal Property Group in its Best in Building Health Leadership Awards for thought leadership and awarded QuadReal the Fitwel Promise Award for Most Benchmarked Projects of All Time.

The financial impact of healthy buildings: rental prices and commercial office market dynamicsa study by the MIT Center for Real Estate, showed that healthy buildings certified WELL or Fitwel generate 4.4% to 7.7% higher effective rents per square foot than their nearby non-certified and unregistered peers.