According to Refinitiv Lipper, over half of fund flows in Europe in 2020 went into ESG products, totalling circa €290bn (£248bn). And earlier this year, Morningstar reported that in 2020, 253 European investment funds had changed their strategies and/or profiles to embrace ESG.
Last year, 505 European ESG funds were launched, while at the end of December, there was an 84% quarter-on-quarter rise in inflows to sustainable European funds.
Investors are voting with their feet, or rather their pockets, and real estate investors, managers and occupiers would be foolish to ignore the momentum behind ESG and impact-related investments. Real estate industry stakeholders are now expected to have a greater awareness of the impact of their activities on the climate and communities as the industry navigates a path to net zero carbon emissions.
One area that looks to be gaining traction with investors, including pension funds, is local impact lending. Investors are often willing to lend to local developers where mainstream banks will not, enabling the private sector to bring forward commercial and residential schemes.
These investor/lenders are not purely focused on financial gains and look to other key performance Indications, which may include: job creation and provision of apprenticeships; brownfield site regeneration; refurbishing obsolete buildings; creating energy-efficient buildings; and investing in the public realm or education.
By acting as a “lender of last resort”, investors can generate an acceptable level of return to meet their fiduciary responsibilities, while having a measurable positive impact on their local areas.
Managers and occupiers would be foolish to ignore the momentum behind ESG invetsments
It is possible to negotiate green loans to provide further incentives to developers. Given the typically short duration of these loans, investors’ equity can be recycled and redeployed three or four times over a 10-year period.
In a post Covid-19 landscape, many parts of the UK could be increasingly reliant on local impact lending to improve town centres, where there is likely to be an oversupply of retail, and to enhance the viability of less economically robust residential projects.
There has been a noticeable increase in the measurement of ESG and social impact over the past decade. It is arguably easier to measure the effect of landlords’ or tenants’ environmental impact than it is to measure their social impact, as the consequences are more empirically measurable.
But in recent years, there have been significant improvements in how we can measure and monetise the more subjective social impacts of real estate ownership or occupation.
Investors and occupiers are becoming increasingly demanding and are holding their advisers and managers accountable to higher standards. It is very encouraging to see the number of institutional fund managers who have made firm carbon zero commitments over the past 12 months. As real estate managers, we will have to be able to demonstrate our commitment to ESG and social impact to win new business or retain clients. Most new clients already insist that an adviser has a responsible investment policy and can demonstrate the climatic and social impact of their strategies before they are shortlisted for mandates.
The message from the massive volume of sustainable investments in Europe in Q4 2020 — accounting for 80% of the $152.3bn (£109.4bn) of global ESG fund inflows, according to Morningstar — is loud and clear. Get with the programme or get out of the game.
Graeme Rutter is head of CBRE’s investment advisory team
Guide to finance: sector report March 2021
- Currently reading
Investing in ESG is paying off