What has been the approach of the real estate industry towards sustainable investments up to now?  

In the last year or two, there has been a real focus on green building certification and finding the buildings in a portfolio that have higher energy efficiency and lower carbon emissions. This includes getting rated for and reporting that to investors. There is a particular focus on making sure buildings are up to standards and have high energy efficiency on the new development side. There is also a lot of attention being paid to assessing portfolios and understanding the level of carbon emissions across buildings, which is followed by setting a plan to reduce them over time.

People are just getting their heads around the data and starting to understand how emissions work. It is one thing to understand the emissions of the parts of buildings that the landlord controls, but when you have tenants in there and they are responsible for their own energy consumption, it is difficult to get ahold of that data. Having a full picture of your exposure is quite difficult but necessary before you even start thinking about what to do about it.

Will Robson

Executive Director and Global Head of Real Estate Solutions Research
MSCI

  Will Robson is Executive Director and Global Head of Real Estate Solutions Research at MSCI.  He is responsible for the direction and delivery of MSCI’s applied real estate research agenda which seeks to help clients understand their real estate portfolios and the markets in which they compete.  The research leverages the unparalleled breadth and depth of MSCI’s private real estate data by combining it with the firm’s powerful analytical tools helping clients tackle their everyday investment problems. Prior to MSCI, Will spent close to five years at Abu Dhabi Investment Authority as a senior, founding member of the real estate research team, helping to build that function by building tools and analytical frameworks to aid and enhance the real estate investment process.  Will also worked as a research analyst at M&G Real Estate during which time he became responsible for the firm’s property derivatives activities and also become heavily involved in developing an approach to cash flow simulation risk modelling. Will began his career as an Economist with the Royal Mail and holds both an MSc and BA in Economics from the University of York and the University of Newcastle upon Tyne respectively. More »

In practice, how are environmental criteria implemented in real estate projects?

In practice, there are leaders that are really looking at new developments and trying to make sure that they are net-zero in a holistic way. They look for low-carbon building products and they try to reduce, mitigate or offer emissions all around. For the vast majority, the focus is still on trying to make sure that their buildings are fitted out in an energy-efficient way and on getting the right kind of green certificates to make their buildings more marketable to tenants. When it comes to redevelopment projects and major refurbishments, there are strategies evolving now where the angle in terms of the investment proposal is about making a dirty building cleaner.

What are some of the ESG issues being tackled by real estate investors?

ESG is a very broad topic area. It includes clean environmental matters, but also social and governance issues. I would say climate is at the top. So, within the environmental pillar, a lot of the focus is on the transition risk, around carbon emissions and aligning with net-zero strategies. But physical risk is way up there as well. Over the last year or two, there have been various incidences of significant flooding events, wildfires, all these kinds of acute physical risks, and people are making the linkage to climate change. So, there is a lot more demand from asset owners to understand their exposures to these risks. And not just understanding how frequent these events might become and how impactful they might be in terms of damage but trying to translate that into a financial risk. So, there is a big focus on those two areas.

Also, moving into the social side of ESG, we are starting to see social impact funds being raised across all asset classes. A lot of funds in the EU are being raised and marketed as social impact funds under Sustainable Finance Disclosure Regulation (SFDR), but trying to prevent greenwashing and social washing, delivering on the promised impact and measuring all these elements is difficult. And that is the area that we are trying to get into. –We want to help people measure these in an objective way.

On the social side, obviously, climate risk is difficult to measure, but at least there is some science behind that and you can find metrics to track over time. So sure, just the very nature of social impact is a bit more intangible and qualitative but I think things like the UN Sustainable Development Goals help provide a framework that a lot of clients are building strategies around. If we can measure things around frameworks like that, I think we start to bring standards to impact investing.

Does the focus on ESG matters improve the financial performance of companies?

From the private real estate perspective, data is a lot more opaque in private markets than in public ones. You are also relying on valuations rather than transaction prices. We are starting to see valuers account for climate risk and social impact in a tentative way now, but we are not yet seeing obvious signs in performance.

A paper focused on listed equities released by MSCI a couple of months ago showed the performance impact of ESG, particularly on climate. This covers companies that are heavily exposed to climate risks. For oil and mining companies, when you focus on climate matters, you can see those companies underperforming the broad market. We see a boost of performance for companies that are involved in developing green technology.

When you get to sort of the middle of companies, there is no obvious impact yet. As the price impact around dirty technologies or dirty inputs of production or manufacturing processes feeds through the supply chains, you will see that the impact starts to affect all companies. With regulation increasing, we will start to see the same in private real estate.

The EU aims to be climate neutral by 2050. Will this enhance the development of ESG strategies in the European property sector?

It has the potential to do so. In some ways, regulation catches up with the leaders in the market. There are already asset owners or asset managers that are doing more than is required by regulation. A big thing around making a difference is giving investors and asset owners the data and the knowledge about where the risks are and who is doing a good job and who is not doing such a good job so that they can divert their capital one way or another depending on that data. To be able to make those decisions, you need to have everything measured in a consistent way.

Regulation often helps to bring standards around measurement and equal footing in terms of transparency. I think it will help in that way. Obviously, the regulation sometimes is suboptimal in terms of wanting to do the right thing and having unintended consequences but in general, having more standards and more disclosure is better for financial markets.

Is the successful implementation of an ESG strategy based on a strong digital component?

Digital means more data and transparency. It is absolutely key. A lot of real estate investors are understanding that climate risk is a big issue that they need to get on top of and understand.

Physical risk is relatively straightforward to deal with because you have very accessible models around it. All you need to know is where your asset is as well as its elevation to understand the flooding risk, for example. Furthermore, for transition risk and everything to do with net-zero, you really need to understand the carbon emissions. However, getting that data from the tenants is not always straightforward. Some countries are very protective of private information and it is hard to get that information from tenants, while in other countries it is easier.

When will ESG certifications go mainstream?

More broadly, ESG ratings are provided by private companies. There are different ones out there really focused on the listed markets or fixed income where the level of data disclosure is much higher.

It just takes companies to devise models to come up with ratings. In private markets, even if you have a good methodology for the ratings, the lack of detailed data makes it difficult to come up with those ratings.

The use of ratings is almost mainstream in equities now. There are so many ESG funds, but there are also many non-ESG funds that are using ESG ratings just as another form of risk management. Even just applying ESG index solutions to their broader portfolios, in real estate, because of the private nature of it, we are a little bit further behind. When you are talking about an individual building, you do not have a specific policy. So, the concepts are a little bit different. There is massive demand from our clients to replicate what they are doing in equities to private markets.

As data becomes increasingly available through regulation, or just through just the natural development of financial markets, I think that will change. At, MSCI, our CEO is saying that we will get to a point where ESG is not a thing, a separate thing. It is just the way people manage their real estate or their investment portfolios. It will just become another dimension to risk management.