This article is sponsored by CBRE Investment Management
How has the role of ESG in real assets evolved in recent years?
We have seen a rapid acceleration in ESG focus and interest from our stakeholders including investors, regulators, tenants and employees. This was further amplified by the commitments made by both the public and private sectors in the lead up to COP26. There is now a clear sense of urgency to decarbonise the global economy, with countries and companies from around the world setting net-zero targets and creating action plans to meet their goals.
We have seen the ESG focus expand to include a stronger emphasis on climate risk mitigation and adaptation, as well as diversity, equity and inclusion. In the aftermath of the financial crisis, we continue to see a clear desire to restore trust in the capital markets, which has led to an enhanced focus on corporate governance. In order to provide transparency and guidance, governments and coalition organisations from across the globe are establishing more rigorous regulation, frameworks and reporting standards focused on ESG performance.
How has CBRE Investment Management responded to this global focus on sustainability?
It has become clear that the health of our society, planet and economy is inextricably linked, which is why we take a holistic approach to sustainability, jointly considering our planet, people and long-term investment returns. Our value proposition is to deliver sustainable investment solutions, so our clients, people and communities thrive. Sustainability mitigates risk, creates long-term financial opportunities and sustains our planet for future generations.
CBRE Investment Management has a long history of demonstrating sustainability leadership. We were signatories to the UN Global Compact in 2007 and UNPRI in 2009. We were also one of the first to pilot GRESB, an industry-wide benchmark for sustainability in 2009. More recently we have established our Sustainability Vision, where we seek to lead the transition to a sustainable future. Our Vision focuses on three specific areas: Climate, People and Influence.
We recognise that nearly 40 percent of greenhouse gas emissions come from the real estate sector, and an even greater percent if you include infrastructure. Therefore, we are addressing climate-related risks and opportunities by focusing on delivering physical resilience and net-zero carbon performance.
We also recognise that millions of people use our assets every day, and so we strive to improve their social and physical well-being and to be champions of diversity, equity and inclusion (DE&I). Influence represents working with our partners and encouraging them to make sustainable choices and to effect positive change which includes our tenants and supply chain.
Do you think the emphasis of ESG has shifted from risk to opportunity?
Yes, investors are increasingly interested in funds with strong ESG performance, and tenants want to live and work in spaces that are environmentally and socially sound. Thus, making sure that we are acting on behalf of our stakeholders creates opportunities. We also now see more research linking high ESG performance buildings with enhanced valuations.
How should ESG considerations be incorporated into investment decision-making?
Over the past several years we have started integrating ESG into our investment process, from acquisitions through asset management.
“Nearly 40 percent of greenhouse gas emissions come from real estate”
ESG topics are incorporated into our investment committee memos, and an ESG team member has voting rights on each regional or investment strategy investment committee. We are increasingly working on incorporating climate risk analysis into each IC memo across our investment strategies – this provides insight into potential risks and opportunities.
With regard to governance, our CEO has ultimate oversight of ESG with the strategic direction set by our Global Sustainability Council. The head of sustainability and innovation, which is my role, is on the Executive Committee and leads an in-house ESG team comprised of scientists and engineers who are supported by ESG champions across our organisation.
And how do you seek to make ESG improvements to assets over the life of an investment?
For all long-term, core assets, we are following a path to operational net-zero carbon performance that includes energy efficiency upgrades, converting to electrification and switching to renewables, either onsite or offsite.
Of course, you can’t manage what you don’t measure, so it all starts with measuring and analysing the performance of each asset. To help drive assets level performance we often undertake environmental audits and propose environmental, well-being, health and safety certifications. We also submit most of our funds to GRESB (over 60 portfolios submitted in 2021) and separately assess both physical climate risk and transition risk.
As an operator, as well as an investor, we can truly make a difference at every stage of an asset’s lifecycle – either directly or by influencing our network and end users to make positive change.
Is it challenging to access the data you need at that asset level?
It’s easier than it was several years ago, but it can still be challenging depending on the type of lease, tenant engagement and property type. What I will say, is that there is a sense of momentum today, and we are using that momentum to engage with our stakeholders. We are in the process of creating a knowledge hub to help our asset managers, property managers and investment professionals understand the ESG information that they need to engage with tenants, investors and other stakeholders. Part of that education process will emphasise the importance of capturing this data. The next frontier on data capture includes social and embodied carbon.
In addition to being the head of sustainability, you are also head of innovation. Why do you believe the two roles are complementary?
Many of the innovations and technologies that will be necessary to establish a low-carbon economy have yet to be developed, tested or brought to scale. Over the coming years more innovations will come online, whether it’s green steel, low-carbon solutions, credible global carbon exchanges or energy storage technologies.
Robust product assessment and adoption will be important for the industry to reach our climate mitigation and adaptation goals. Close alignment between sustainability and innovation makes all the difference in the pace of change. We want to be at the forefront of innovation and invest in and integrate new processes and technologies on an ongoing basis.
So, what does the future hold?
Over the next five years, I believe our fund and portfolio managers will be-come as comfortable speaking about ESG factors as they are their financial performance.
All of our funds will ultimately have to demonstrate strong ESG performance as part of the standard course of business. Exemplary ESG performance will be essential to be considered by investors in the future.