Article by Chris Beales
As responsible investing moves to the forefront of the real estate industry, implementing a modern, robust and transparent ESG programme is more important than ever.
The Rise of Responsibility
2020 shifted corporate and investor focus more towards sustainability than ever before. Responsible investing and Environmental, Social and Governance (ESG) considerations have long been an area of focus for the investment world. But 2020 has shone a light on the roles that entities from corporations to real estate to investors can play in society, and as a result more capital is targeting responsibility. Data from the UK’s The Investment Association shows that responsible investment funds under management grew by 66% in 2020, in comparison to 7% across funds overall, with UK savers investing on average £1bn a month into responsible investment funds throughout the year.
Amid this landscape, the real estate sector continues to deepen its relationship with sustainability. PWC’s 2021 Emerging Trends in Real Estate: Europe 2021 reports demand for impact investments is expected to grow in the coming 3-5 years. While one developer highlighted that “investors have been under pressure to deploy capital in strategies that are environmentally sustainable for some time now, and we are starting to see that same pressure to deploy in strategies that are socially impactful”.
But what does it mean to invest responsibly? And how does a fund or property truly deliver for society?
ESG & Social Value
‘ESG’ has been the go-to approach for many real estate investors in recent years. A traditional ESG approach incorporates responsibility into investment practices by allowing for compliance with sustainability regulation, avoiding sectors or investments that go against a broad responsibility approach and the production of key metrics to provide a guide as to how a fund or asset is operating. But despite ESG being a relatively new area of the investment market, many firms are already outgrowing this traditional ESG approach.
Speaking at an Impact Investing Institute event in late 2020 Mark Carney – the former Governor of the Bank of England and now Vice Chair of Brookfield Asset Management and Head of ESG and Impact Fund Investing – raised that ESG investing is moving well beyond negative screening towards finding companies that are truly creating value. Similarly, in Larry Fink’s 2021 Letter to CEOs, the BlackRock Chairman and Chief Executive Officer highlighted that within the ESG sector, companies with better ESG profiles are performing better than their peers, enjoying a “sustainability premium”.
ESG approaches in real estate are now transforming to generate better outcomes for society and investors alike, and this is where social value plays a crucial role.
Social value refers to the positive impact on society generated by a sustainable activity, which can often be reported as a pound value. Integrating social value into an ESG policy and allowing social value to shape a responsible investing programme can lead to more tangible outcomes, greater societal benefit and enhanced ESG transparency. Importantly, social value reaches far beyond the ‘S’ of ESG. There is social value in reducing carbon emissions, in diverting waste from landfill, in promoting sustainability processes throughout procurement.
Social Value in Real Estate
Social value can be considered throughout a real estate asset’s life cycle. Social value can be incorporated through the measurement of the design team’s activities; it is becoming more important to have a robust approach to considering social value at the planning stage; and the social value being delivered throughout construction should be measured and reported. That said, Social Value Portal estimates that 85% of all social value generated by a property comes at the in-use phase when considering a 20-year life cycle.
The generation of social value in the built environment stems from the activities of the property management team, suppliers and tenants at the property. For example, if an office tenant’s employees deliver career advice to young people, if a property manager reduces carbon emissions by switching to renewable sources, if an industrial tenant offers a wellbeing support programme to its employees, then the asset ‘unlocking’ this social value is benefitting society. It is more important now than ever to understand the full picture of how real estate generates social value, and how to maximise it.
Measuring Social Value
The National TOMs is the UK’s leading social value measurement framework. Named TOMs for the Themes, Outcomes and Measures the framework is built around, the framework provides a social value measurement and reporting system for real estate assets throughout the life cycle.
The alphabet soup already contains a lot of great initiatives for real estate investors. From GRESB submissions and BREEAM ratings, to WELL Health-Safety seals and LEED certifications, real estate professionals are able to use a range of frameworks to contextualise their ESG approach. The National TOMs sits alongside many existing frameworks, helping to build a picture of the pound sterling amount of social value that has been generated for a local community and society as a whole by a property through responsible activities. Being able to quantify these activities allows for ESG target setting, improvement plans and the maximisation of societal benefit.
Not all ESG policies are created equal. Transitioning from a policy built from regulation and screening, towards an approach that quantifies and aims to maximise the social impact of a real estate asset across ESG pillars can prove an important resource when answering ‘How do you invest responsibly?’.