ESG: Making sense financially as well as ethically

Aviva Investors’ annual property conference highlights the growing role of ESG factors in making investment decisions.

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With real estate consuming around 40 per cent of the world’s energy and generating 20 per cent of greenhouse gas emissions, effective environmental stewardship is an absolute priority for any professional involved in the management of property assets. But while the broad benefits of environmental engagement appear to be well understood by valuation and legal practioners alike, is there a lack of understanding of the social and governance aspects? This was one of the questions addressed at Aviva Investors’ annual property conference, held in Norwich on 24 October.

The growing influence of ESG on corporate decision-makers was recognised and welcomed by many of the 200 real estate professionals in attendance. The ability of ESG engagement to alter behaviours for the better, not just in real estate but across asset classes, was underlined by Abigail Herron, Aviva Investors’ Global Head of Responsible Investment, who related how placing ethical conditions on a potential new equity investment had led one company to cease manufacturing cluster munitions. Andrew Edkins of the environmental faculty of the University College, London, agreed that ESG was becoming a catalyst for positive change: “I am delighted that this is no fad. For a company to say it will stop an activity because of objections by an investor is testament to the power of influence.”

Focusing on lending in the commercial property sector, Gregor Bamert, Aviva Investors’ Head of Real Estate Finance, stressed that while ESG represents a huge challenge for the asset class in terms of risks, it can also create opportunity: “If we are working with property owners who have a long-term commitment to an asset and are thinking carefully about how it will not only interact with its environment from an ecological perspective but also fulfil a defined purpose, then the chances are we will have an asset that will show good appreciation over the long term.”

From the valuer’s perspective, Chris Strathon of JLL saw the potential to use ESG risk as a lever to galvanise performance from apparently illiquid assets: “It might be someone’s opportunity to take a non-performing property and make it compliant with ESG.”

When questioned, the majority of delegates felt that while the social and governance benefits and challenges of ESG in real estate were less appreciated, this was starting to change, albeit slowly. Lorraine Howells, valuations director at CBRE, suggested an element of compunction may ultimately be necessary: “Larger corporates seem to have a more forward-thinking and holistic concept of social responsibility than smaller companies, whose profits and margins are often tighter. To bring the tail up and encourage those who are less willing, we may need to see legislation, as was the case with EPCs (Energy Performance Certificates).

A number of delegates conceded they needed to know more about this increasingly relevant topic, not only from their own perspective but also from the standpoint of companies such as Aviva Investors. As a lender of capital, Gregor Bamert emphasised that advisers need to be aware that the advice they are giving is providing the platform for people to make long-term investment decisions. “If they are not taking into account something that, during the potential twenty-five year life of an investment, will be a significant impact, then they are not really fulfilling their responsibilities,” he cautioned.

James Smith, Senior Portfolio Surveyor at Aviva Investors, concluded the conference by underlining the importance of stakeholders working together to ensure all elements of ESG are fully integrated into the decisions they make: “As a financing industry we’ve got to collaborate better to assimilate information inputs across a broad sweep of ESG factors, some of which will go well beyond current regulation and legislation. Ultimately, I believe this new focus will lead to the development of much-needed ESG systems and rating approaches alongside seeking increased commentary from our advisers on property risk and value implications as a result of ESG.”

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