One of Asia’s leading property investors has criticized participants across global property markets, including regulators, for the slow pace of improvements around ESG.
“I understand there is a risk of greenwashing, but currently we are wasting too much time with proving we are doing the right things — with debates over reporting, auditable data, and standardisation — instead of doing the right things,” Dr Raphael Mertens, chief sustainability officer for Allianz Real Estate, told AsianInvestor.
Time that should be spent improving the environmental impact of buildings was being wasted focusing on getting precise audit-level data on emissions, Mertens added. “The direction is clear: we need to just get it done. Regulation can help and make it easier, but it’s up to the industry to do what is needed.”
“For regulators and auditors, there is sometimes a belief that if you can’t prove something directly then it doesn’t exist,” he said, adding that in other cases participants were using the lack of clear data as an excuse not to act.
“I spend so much time with stakeholders such as regulators and auditors discussing data harmonisation. But for me, it should be a 50-50 focus [between reporting and doing],” Mertens said.
Allianz Real Estate hired its first devoted ESG specialist for Asia last summer to work on developing the company’s approach to decarbonise the portfolio in the region, where it currently has €9.1 billion ($11.1 billion) under management — which is 10% of its global total of €91.3 billion AUM — with ambitions for further growth in the region.
Mertens said that investors — either directly or through their managers — were often reluctant to speak to tenants about issues related to ESG, such as energy use, fearing tenants would resent the interference.
“But often, we find that tenants were waiting for you to raise it and they appreciate the move. Some are even more ambitious than we are in this respect in that they have committed to achieve net zero earlier than 2050, and therefore have to act faster,” he said.
Where tenants were resistant, investors still had a responsibility to advocate for change, he added. “I am a strong believer in engagement: making our case and convincing [tenants] over time [to improve],” he said. “I’ve had lots of chats with asset managers and leasing managers, but really it’s a case of ‘just do it’.”
WORTH THE EFFORT
Mertens noted that delays in improving buildings’ footprints were unacceptable, given the clear commercial benefits of making ESG improvements, with tenants prepared to pay higher rents for those that scored well in ESG.
“Especially since the pandemic, we see that, for buildings that are fully compliant with what tenants need, we can increase ERVs [estimated rental values],” he said.
Mertens said that the pandemic had resulted in a bifurcation in the office market, driven by tenants. On the one hand are offices that score well from an ESG perspective as well as on commercial criteria, for which tenants are willing to pay a premium; on the other hand are the rest.
However, Mertens noted that in Asia, the bifurcation was limited to developed economies such as Australia, Japan, and Singapore, while it was less pronounced or absent in China and other parts of developing Asia.
In The value of sustainability: Evidence for a green premium in Asia, published last November, JLL revealed that buildings that had achieved a high level of green certification commanded higher rents than equivalent non-green buildings in the region, but that coverage of green certified buildings in many countries was still poor.
HONG KONG BEHIND
In Hong Kong, the green premium for grade A office buildings was 28%, the highest of the 14 cities surveyed, but the coverage was just 29% of the sector, the lowest of the 14 alongside Guangzhou, China.
Other cities with low coverage were Bengaluru in India, with 35% coverage, Seoul and Tokyo, both with 37%, and Bangkok, with 39%. In only one country — Singapore, which has a coverage of 90% — were more than half of grade A office buildings green-certified.
Kamya Miglani, head of ESG research for Asia Pacific at JLL in Singapore, said that a continued obstacle to lower emissions from the sector was that few asset owners saw an ESG benefit to buying a brown building and turning it green, rather than buying or building a new building that had low emissions to begin with.
“Right now, investors avoid those buildings because they make them look bad. Someone has to prove the return on investment in terms of the environmental credit,” she said. “It will be three to five years before investors will look at things this way.”