Pensions & Investments released its annual Real Estate Money Manager survey earlier this week, finding that ESG assets accounted for $372 billion of real estate assets managed for U.S. institutional, tax-exempt investors as of June 30.
That correlates to more than half (51.2%) of all real estate assets in the country, with ESG assets comprising 43% of worldwide real estate managers’ assets ($841 billion) and 24.8% of global real estate investment trusts assets ($120.7B).
Pensions & Investments (P&I) says this is the first year it has asked real estate managers to quantify the amount of assets they manage under ESG principles, and noted that while ESG reporting is growing in importance and adoption, many managers still felt it is a work in process.
Despite this, some firms have been quick to adopt ESG operating and reporting principles, with TIAA subsidiary Nuveen topping that list for worldwide and U.S institutional, tax-exempt assets with $143.5 billion and $105.8 billion. The management firm also came in second in REIT assets managed under ESG principles ($12.1 billion).
While a growing list of countries, states and management firms have taken the first step with net-zero pledges and commitments, Aegon Asset Management managing director and Global Head of Real Estate Assets Research Martha Peyton says that the next step is more complicated.
“How do owners of property … managers in the real estate sector, how are they going to get there? That is the question that is on the table now,” Peyton told P&I, noting there are not a lot of answers in the space.
“You cannot address what you can’t measure,” she said, adding that data can give managers the raw insights needed to make strategic plans for decreasing their carbon footprints and reaching net-zero.
Climate risk’s role
The report also noted that real estate managers have a growing need to incorporate climate risk into portfolio analysis, and claimed rising property and casualty insurance costs as a significant factor. It says that while there are tools to measure energy usage and carbon footprints for properties today, none of them are useful in the long-term real estate investment process.
“Given the reality of the investment, what manager wants to be the first one to start pricing climate risk 20 years out? Who wants to raise their hand to do that?” Peyton said.
In addition to supplementing and improving investment risks data, the survey also found that implementing ESG principles can help enhance property performance.
It claims that as tenants move towards higher-class assets, in part due to growing interest rates and lack of housing supply, new construction and retrofit-capable assets will continue to outperform and help managers compete in the ongoing “amenities arms race.”
“Tenants continue their ‘flight-to-quality’ to the top assets in the market that offer modern amenities and that have lower carbon emissions than legacy assets, a point that will only amplify in importance in the coming years as more firms look to their real estate to improve their ESG performance,” stated Carly Tripp, CIO of Nuveen Real Estate.
Not so fast..
Although ESG is continuing to spread throughout the real estate sector, it is important to note that growth may be slowing as investors adjust business strategies to better handle ongoing market concerns.
This is highlighted by a recent KPMG CEO Outlook survey, which found that while 59% of respondents said ESG goals were “important,” they planned to pause or reconsider their organization’s ESG efforts in the next six months “as they adjust their strategy to prepare for a recession.”
The KPMG survey attributes this pause to addition scrutiny from stakeholders, citing mounting frustration over lack of standards, political pushback and exaggerated claims as reasons for ESG adoption’s softening outlook.
Despite these factors, 70% of global CEOs said their company’s ESG programs improved financial performance, compared to just 37% last year, with the survey also identifying access to capital as “the top risk pertaining to failing to meet stakeholder expectations around ESG.”
Don’t forget the S and G
In addition to the environmental aspect of ESG, the P&I survey also found that there is progress being made in the S (social) and G (governance) portions of this reporting movement.
It says this is shown by the 22.2% of senior management which are women, up from 18.5% a year prior, and the growing portion of women (19.5%) and minority (18.9%) real estate investment professionals.
“It’s important that we get diverse perspectives from change leaders willing to collaborate to develop solutions that are relevant for as many industry stakeholders as possible,” said Lisa Stanley, CEO of real estate standardization organization OSCRE International, in an interview with GlobeSt.com.
“It’s important that we get diverse perspectives from change leaders willing to collaborate to develop solutions that are relevant for as many industry stakeholders as possible,” Stanley said.