Responsible Investment and ESG have traditionally been biased towards liquid assets such as equities and bonds. There are several reasons for this, including the weight of assets under management, availability of information, and the rights and access provided to shareholders.
However, more recently the importance of ensuring ESG factors are also appropriately embedded within alternative asset classes have risen in prominence. This is primarily due to a reallocation of assets amongst pension funds towards alternative solutions and a recognition that more illiquid assets, by definition have longer-term investment horizons, and consequently are arguably more exposed to ESG risks.
The issue has gained even greater significance with the recent focus on blended finance as a tool to help deliver the UN Sustainable Development Goals. At Aviva Investors we understand that alternative asset classes have unique investment considerations and have made significant progress in developing bespoke ESG strategies from real estate and infrastructure to structured finance and private corporate debt.
As Mark Nevitt, Senior Director Global Real Estate, says: “We recognise that our properties can have a significant role to play in local communities and we are working to ensure that they make a positive impact in their location for our customers and the wider community.”
Sustainable real estate
We believe that integrating ESG considerations can deliver real value in terms of cost savings, enhanced returns and reduced regulatory and obsolescence risk within our real estate assets. Consequently, we consider ESG issues in our investment decision-making and due diligence processes for new investments, as well as existing direct and indirect investments. Our environmental policy, implementation and performance is overseen by our Responsible Property Investment Committee (RPIC) which includes representatives from across the real estate and responsible invest teams. In addition to the quarterly RPIC meeting, we also host a regular meeting with environmental consultants, property managers and suppliers to discuss emerging sustainability themes and to share best practice.
We were founding members of the Global Real Estate Sustainability Benchmark (GRESB), the industry-driven organisation assessing the ESG performance of real assets globally, and have maintained a seat on the GRESB Advisory Board since its launch in 2010. It is supported and used by both our direct and indirect real estate businesses in different ways. In 2017, we submitted 19 funds from our direct real estate business for benchmarking assessment and were delighted that we saw improved scores across all our funds.
Our indirect real estate business engages all our unlisted and listed real estate funds to complete the GRESB survey (we had an 87 per cent global response rate in 2017, up from 78 per cent in 2015). The GRESB results are fed back to each underlying fund and follow-up discussions are held with every manager.
For example, The Corn Exchange in Manchester is a Grade II listed building that was converted to restaurants. Following the conversion, energy consumption was identified as being much higher than expected. Carbon Credentials were employed to implement their Collaborative Asset Performance Programme (CAPP) to assist with diagnosing and remediating energy inefficiencies. Information from data collection devices, site audits and collaboration with stakeholders, produced a list of agreed changes to achieve energy and cost savings. The subsequent changes resulted in a reduction in energy consumption of 42 per cent and a return on investment within three months. Aviva Investors is now reviewing the option of fully integrating CAPP within its management systems.
In July 2015, Aviva plc announced an investment target of £500 million annually for the next five years in low-carbon infrastructure. We also set an associated carbon savings target for this investment of 100,000 tonnes of CO2 annually. We worked together with an independent consultant to develop a ‘carbon calculator’ tool to enable us to measure the carbon equivalent savings associated with our portfolio. In 2017, we exceeded our targets and signed £527.5m of new investment into wind, solar, biomass and energy efficiency projects. As part of our ESG integration approach, all infrastructure projects that are being considered for either debt or equity funding, are subject to an ESG due diligence process. This covers a broad spectrum of considerations including biodiversity impacts, climate strategy, labour rights and safety, stakeholder relations and political lobbying. The conclusions from the due diligence process are reviewed by the Alternative Investment Committee prior to the approval of any project.
We address a variety of ESG issues across our transactions, including managing the biodiversity impacts of our projects. When undertaking analysis of a potential medium scale wind farm investment, our ESG due diligence process flagged a concern with disruption to nesting birds in the vicinity. The project received final internal approval only after the commissioning of a Breeding Bird Protection Plan designed to safeguard and mitigate the impact on the birds.
Our growing private lending business provides our clients access to enhanced income, capital preservation, diversification and cash flow matching. This includes commercial real estate debt, structured finance (mortgage-backed securities, government-guaranteed loans, trade and credit financing), and private corporate debt.
Higher premiums are achieved in exchange for less liquidity and transparency. This places additional responsibilities on us to apply greater rigour during the due diligence process to assess ESG risks. Each investment team in collaboration with the GRI Team has begun developing an asset specific ESG assessment framework which applies both pre and post investment. This includes our Paris based private corporate debt team implementing a comprehensive online ESG due diligence process that all counterparties are required to undergo prior to the finalisation of lending agreements.
James Smith, Senior Portfolio Surveyor (Real Estate Debt), says: “Forthcoming environmental regulations have the potential to impact on building owners’ letting options and resultant cash flows. Therefore, the ESG characteristics of properties and the credentials of our customers to manage these will increasingly become a material factor in our lending decisions.”
For example, the structured finance team refer high-risk opportunities to the GRI Team for review. The GRI Team then undertake an initial ESG assessment of the underlying counterparty and/ or project being financed for reputational and investment related risks. Over the past year this has frequently resulted in requirements for an additional layer of due diligence and an on‑going monitoring of the ESG commitments of the counterparty. In the case of a high profile infrastructure project, the proposals presented to the investment committees were revised to include a detailed evaluation of the impact on local communities during the land acquisition process.