ESG and Impact Investing: In hindsight, it might seem obvious

Max Shenkman

Max is Head of Investment at Triple Point Investment Management and is responsible for all direct investments into property, with a focus on social and affordable housing. Max was one of the first equity fund managers to invest directly in social housing. Since 2015, he has deployed more than GBP 500 million into properties throughout the UK that have helped to unlock better tenant outcomes for vulnerable people unable to afford market rents.

In 1988, a McKinsey paper declared that a business is a value delivery system and that delivering superior value to customers was at the heart of successful business strategies.
Over three decades later, delivering value to your customers seems to be a business maxim that has been evident all along. Today more than ever, it is increasingly apparent that neither the company nor the customer exists in isolation and that, even if unwittingly, we are all stakeholders in our communities, in the environment and in the world that we inhabit.
In the future, it may be nothing more than common sense that great property investments are built on a stakeholder-centric approach of delivering superior value to a wider group that includes, but is not limited to, tenants and shareholders.
Whilst we are still a long way from social or environmental impact being rational business goals, there is a growing interest in investments that can deliver more than just financial returns. Inflows to Environmental, Social and Governmental (ESG) funds from British investors have multiplied by thirty-five since July 2017.
Historically, some have assumed there has to be a trade-off between financial returns and improving ESG and impact criteria, but a growing body of evidence suggests that this is not the case and actually the reverse might be true.
In more than 2000 peer-reviewed academic studies, only 10% found there was a negative relationship between corporate financial performance and ESG criteria. In real estate, more than 70% of the studies pointed to a positive relationship between performance and ESG metrics.

Boathouse in Lichefield

Oak House in Birmingham

Park View Apartments, Wolverhampton

Furthermore, research by Morningstar and MSCI has concluded that investments with strong sustainability indicators have outperformed their broader market counterparts in recent market downturns. Behaviour during the recent downturn suggests that investors are alive to this resilience. As of Q1 2020, there has been a 41% year-over-year increase in inflows to sustainable funds, despite an extraordinary level of volatility and market drawdowns. The Triple Point Social Housing REIT, which provides much-needed homes to vulnerable people with care needs who have their rent funded by the state, is a case in point. The company received 100% of its Q1 rent, and its share price is higher than it was at the start of February this year.
The need for economic stimulus against the backdrop of an unprecedentedly sharp economic downturn has increased calls to use this as an opportunity to accelerate a transition into a greener economy. Nearly a third of Germany’s EUR 130 billion stimulus package will be dedicated to green initiatives, such as building energy efficiency upgrades, subsidies for electric vehicles and developing renewable energy infrastructure. It is increasingly likely that the UK may follow in Germany’s footsteps, as there is mounting pressure from business leaders and the public for the country to take a similar approach to its recovery plan.
The coronavirus pandemic has had a profound impact on society and the Real Estate industry by changing the way that we work, consume, and interact with the built environment. It is hard to tell how many of these changes will be transient, but all the evidence suggests we are moving towards a world where governments, institutions and individuals expect investments to deliver more than financial returns.
The future might bring an outsized demand for those that can deliver superior value to stakeholders, the environment and society – and, eventually, it might seem that this was evident all along.