Real estate demonstrates sustainability outperformance

“Sustainable finance is a comprehensive approach that brings together different strategies for improving the social, economic and environmental performance of the financial system.” — UNEP Inquiry, Definitions and Concepts

There should be no doubt that sustainability has an important role to play within the listed real estate sector, and we should be keen to demonstrate our capabilities to attract further investment and improve the environment in which we live. The most recent EPRA Investor Relations Committee in April 2018 heard how Gecina and Kempen Capital Management have embedded sustainability into their business processes. We also received an update on the EPRA Sustainability Best Practices Recommendations (sBPR).

The EPRA Investor Relations Committee comprises of 18 Heads of Investor Relations from listed real estate companies across the membership. We ensure there is a range of companies represented by geography, sector and size to reflect the EPRA membership. The goal of the committee is to “develop the industry message to investors and assist investor outreach in disseminating it”. It is important that committee members are prepared to participate and contribute on behalf of the wider investor relations community, and EPRA is grateful for the involvement and assistance from committee members to date.

The committee considers topics relevant to the investor relations community and EPRA investor outreach. Over recent sessions, discussions have included the importance of sustainability, the potential impact of passive investing and feedback from the recent MiFID II implementation.

On this occasion, Gecina was represented by Nicolas Jandot, Sustainability Projects Manager, and Kempen Capital Management by Jorrit Arissen, Senior Portfolio Manager of Real Estate. EPRA was represented by the in-house sustainability team of Hassan Sabir, Director of Finance, and Gloria Duci, ESG Manager.

EPRA sBPR were updated in 2017 to include social and corporate governance impact indicators that are aligned to the EU Non-Financial Reporting Directive. Measuring and incorporating ESG metrics is a proven tool for improving company management and operations, including better overall performance across a wide range of business functions, which could also lead to improved access to capital.

The number of listed real estate companies reporting EPRA sBPR has been increasing since the initiative’s launch. For the 2016 reporting year, more than 90 companies reported at least one EPRA metric. Listed companies are encouraged to use sustainability metrics, such as EPRA sBPR, as they create a common baseline for public disclosure that allows all stakeholders to access ESG information.

Being able to justify sustainable practices with sound financial outcomes responds to investors in a language they understand.

One leading question opened to the floor, and worth consideration by all investor relations professionals, was whether there was at least one page on sustainability within the company presentation. As a rule of thumb, if there is no mention of sustainability in the company presentation, then it is unlikely to be embedded within the business processes.

We should be aware of the evolution taking place in capital allocations that has shifted the sustainability discussion over recent years towards investment for demonstrable improvements. There are considerable incentives being placed upon capital allocation at a political level, for example, the EU’s Action Plan on Sustainable Finance. Asset owner investment processes are also evolving with frameworks, such as the Principles for Responsible Investment (PRI) being prioritised by many of the largest global pension schemes and asset managers. Such developments are to the advantage of the listed real estate sector.

As a rule of thumb, if there is no mention of sustainability in the company presentation, then it is unlikely to be embedded within the business processes.

There was a consensus among speakers that sustainability is an opportunity for all listed real estate companies to integrate processes into their business models and thereby lead to demonstrable value creation. It was noted that engagement with tenants and improvements to their working environment would lead to improved bottom-line performance for the company. The recent trends demonstrate that there is a higher tenant demand for Leadership in Energy and Environmental Design (LEED) or Building Research Establishment Environmental Assessment Method (BREEAM) certified buildings as they influence worker productivity and occupant health and well-being. The EPRA research ‘Decomposing the value effects of sustainable investment’ also provides evidence of higher rental values for firms with a larger share of LEED or BREEAM certified properties in their portfolio. The positive effect of voluntary environmental certifications is consistent with the existing literature: according to a Bentall Kennedy study, green-certified would enjoy 3.7% higher rental rates; 4% higher occupancy levels; and 5.6% higher tenant renewal probabilities.

Within our discussion, it was noted that if sustainability is not yet within a company’s business model, then the opportunity is to introduce it sooner rather than later. If it is not in the price of a building today, it soon will be. One example is represented by climate change adaptation. The real estate industry is being called upon to assess risks and opportunities related to it: cooling costs will significantly increase with hotter weather, water shortages will affect operations and companies should act now to preserve the value of their assets.

There are cases today where investors’ decision-making is positively skewed towards sustainable outcomes. Where investors’ decision-making may presently only be based on risk and return, it is likely that decision-making will soon introduce societal contribution.

From the capital allocator’s perspective, it is easier to demonstrate a positive impact from allocating to real estate than fixed income or a broad equity portfolio. We know these large investors are being encouraged to allocate responsibly and if our sector’s companies supply information that satisfies their needs, we will see an increased relative investment level in listed real estate companies.  

There are also freedoms associated with the demonstration of positive impact. The EU’s Action Plan on Sustainable Finance relaxes capital requirements for banks engaging in sustainable investments "when it is justified from a risk perspective." Gecina has been a beneficiary in 2018 with an EUR 150 million sustainability performance-linked loan where the improved margin is dependent on attaining specific results in relation to environmental, social and governance measures. Kungsleden, the Swedish listed real estate company, recently announced the largest green bond issued by a real estate company in Sweden of SEK 2.5 billion (circa EUR 245 million).

Real estate companies should consider investors’ increasing sustainability engagement as an opportunity.

An interesting point raised in the committee discussion was that so-called laggards to sustainability implementation may presently be overlooked by certain investors that have fixed sustainability high-water marks within their investment processes. Given the goal of sustainability reporting is to demonstrate capabilities within the field, the opportunity for companies that are laggards at present becomes that much greater. Similarly, an investor that looks beyond fixed high-water marks may well find better returns from a company that has not yet incorporated sustainability criteria within its business processes.

Our businesses are responsible for significant resource usage in comparison to other business sectors. By considering and implementing improvements to processes and reporting on the outcomes, we should be able to demonstrate greater relative benefits to the society in which we live. Enabling asset allocators to report on our sectors sustainability improvements to their ultimate beneficiaries will create a virtuous circle for the listed real estate sector and society.