- As real estate goes green, investment opportunities are created
- Multiple ways to invest in green assets
There was a time when environmental enthusiasm was seen as something for the avant-garde. A sustainable building replete with renewable materials and all the futuristic fittings of something out of a space-age movie could have previously been viewed as a trendy asset. In line with such thought, green thinking wasn’t always top of mind for companies or investors.
But such thinking has evolved. These days, taking better care of our natural surroundings can be a symbol of good governance. And good governance can lead to less risky assets. When done right, these assets, such as green buildings, can also provide a stable income stream.
Consumers too, have been driving the green push.
Consumers too, have been driving the green push. Green real estate, for example, has been significantly influenced by tenants as their expectations increase for healthier indoor atmospheres, lower operating costs through efficiency and enhanced market value, according to the Institute of Real Estate Management. Green real estate is no longer just a luxury item for those on the cutting edge. Investors looking to add long-term value to their portfolios can benefit from exploring green real estate.
What’s out there?
What exactly is green real estate? It’s not easy to typecast green assets. Green real estate is no exception from that challenge. Is a real estate asset green because it uses energy-efficient light bulbs or because the property manager abides by environmental standards? There are many different elements to green real estate, which is synonymous with environmental, social and governance (ESG) investing.
While some identify ESG investing as simply buying into environmentally and socially responsible assets, we believe ESG should be embedded into the overall investment process. In practice, this means proper strategic risk and resource management, governance and compliance, industry leadership and working in partnership with key players. Some more granular examples of this include managing risk based on regulation or changing environments and controlling operational costs. For real estate, this could include minimizing tenant migration risk.
The growing desire to live and work in greener buildings is intertwined with another global evolution: the want (and more importantly, need) to improve infrastructure. The world currently invests $2.5 trillion annually in transport, power, water and telecom, according to McKinsey & Company data. 1 The world will need to invest $3.3 trillion each year to meet growth forecasts by 2030. America’s infrastructure score is bleak, a D+ on the American Society of Civil Engineers report card.
Bridging these infrastructure gaps can make a case for greener infrastructure, which can simultaneously drive the value of green buildings, in efforts to construct facilities that are more efficient and can last longer.
More ways to get there
It seems some investors have already taken note of these global needs, with more of them now willing to put money specifically into infrastructure funds, according to the EU High-Level Expert Group on Sustainable Finance. Such funds are one way that investors can access green assets.
When it comes to green real estate, there are several ways investors can access such assets. It can be through direct or indirect investment. One method that has grown in popularity is the green bond.
Green bonds are like any other bond but deal with projects that are environmentally sustainable. Examples include the construction of green buildings, energy efficiency enhancements and climate change adaptation. The green bond market often benefits from government policy support, and right now, there seems to be a substantial amount of support given global infrastructure needs. But the progress is fairly small.
While green bonds have trended upward, the market for it is less than 1% of total world bonds, 2 marked by a tension between the need to guarantee its environmental integrity and the need to increase market depth.
Because of this, green bonds remain a Wild West of sorts as the market tries to figure out which way is right and which way is left.
In a similar vein, it’s not easy to identify what a green real estate looks like. Perspectives on ESG in real estate can vary from manager to manager. ESG management strategies can be incorporated in various ways from ESG thematic funds to engagement approaches.
In our view, ESG is less about having a specific ESG-branded product and more about the integration of ESG factors into the way we invest. Of course, some might disagree with this, as would be natural when you’re entering relatively uncharted territory with many different ideas.
But what we do know for sure is that being thoughtful about the environment and constructing green buildings is more than a passing fancy. ESG consideration is now a firm investment criterion in portfolio management. New ESG-focused vehicles are being launched each year and continue to gain momentum across equity, pension, mixed, maturity and real-estate vehicles. 3
The differences among ESG definitions can make it difficult for investors to fully grasp the concept of ESG. But this has already been changing in the green real estate and infrastructure space because of GRESB, which stands for Global Real Estate Sustainability Benchmark. It’s an investor-driven organization that currently has more than 250 members and measures the performance of global real assets.
It’s a way to hold managers accountable for how much ESG is actually being incorporated into their investments and strategies. As investors, governments, consumers and companies get more serious about protecting our environment, such benchmarks can grow in importance. It is one way that investors can feel less unsure about entering a new space. Sure, it’s still the frontier days for much of ESG investing, but there’s a reason why early American explorers trekked out west in search of greener pastures. They knew there had to be something there that was worth the journey.
Property investments may carry additional risk of loss due to the nature and volatility of the underlying investments and may not be available for investment by investors unless the investor meets certain regulatory requirements. In considering the prior performance information contained herein, potential investors should bear in mind that past performance is not necessarily indicative of future results, and there can be no assurance that such investments will achieve comparable results.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
1“Bridging Global Infrastructure Gaps,” McKinsey Global Institute in collaboration with McKinsey’s Capital Projects and Infrastructure Practice, June 2016.
2 G20 Green Finance Study Group, G20 Green Finance Synthesis Report, 2016.
3 Catella Research 2017, Morningstar 2016 from Catella Market Tracker, July 2017.
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