The real estate sector accounts for around 40% of carbon emissions. It has been quick to commit to reducing this but must act now if it is to halve its emissions by 2030. Estimates suggest $5trn of investment is needed to decarbonise the built environment and ensure the real estate sector can achieve its net zero target by 2050.
Pension funds will play a pivotal role in helping raise this sum as they build long-term investment strategies that meet their ESG responsibilities while returning value to members. We recently conducted a study with European pension funds with a combined AUM of €402bn, which shows that commercial real estate is a critical asset class for pension funds, and allocations are set to rise as key decision-makers recognise property offers genuine solutions across all three pillars of ESG investment.
Most pension funds say green real estate will deliver better returns in the next five years, but allocating to real estate as part of a responsible investment strategy has its challenges. Pension funds admit most of their real estate allocations have weak ESG credentials, with more than one in 10 expecting improvements to take 15 years. ‘Brown discounting’ for property with poor ESG compliance and deferred maintenance risk that may require additional capital outlay is causing assets to depreciate.
Pension funds must overcome significant challenges to improve the performance of portfolios with vastly different property uses and construction, often with legacy issues. Do they repurpose, refurbish or demolish them?
Gathering quality, meaningful data on property’s ESG credentials underpins decision-making but is pension funds’ biggest ESG challenge. Our study shows a lack of suitable data to inform real estate investment decisions, with concerns about collecting the right data, quality of data and data analysis. This is compounded by compliance demands on pension funds to show they have collected requisite ESG data. They also lack in-house skills to improve property ESG credentials, suggesting the industry must provide greater support to investors in developing responsible investment strategies.
More must be done quickly to make real estate green and give investors the metrics to allow effective analysis of ESG credentials, so they can rely on property to help achieve net zero.
Vincent Bryant is CEO and co-founder of Deepki and Katie Whipp is head of Deepki UK
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