Balancing ESG and returns in a property portfolio
As environmental, social and governance (ESG) becomes a mainstream focus for investors, property owners can integrate sustainability while balancing returns from their real estate portfolio, a top executive from Cbus said.
Commitments from insurers have been pivotal for property owners, and integrating sustainability in property will benefit Asean countries, a top executive from CDL added.
Kristian Fok, chief investment officer of Cbus, which serves primarily as the super fund for Australia’s construction and building industry, said that the fund’s portfolio needed to have “particular features around the infrastructure and property space” to meet its members’ needs.
“One of the challenges in the property industry is that often you get instances where workforces are contracted. You may not necessarily get paid appropriately and safety is an issue,” he said at the Responsible Asset Owners Global Symposia last Wednesday (March 23).
That meant selecting assets that not only provide positive returns, but also provide decent paying jobs and ensure sustainability standards.
“The challenge of being able to invest our members money in a way that not only generates strong returns, but also make sure that we're not cutting corners was one that we leaned into pretty early. What we found was that the best place to do that was in the actual premium product place. So a lot of our portfolio is in the very high premium grade properties,” he said.
Last year, Cbus told AsianInvestor that it had started allocating “fairly significantly” to real assets in Australia. The fund posted 11.40% one-year returns in 2021 for its property investments, and 15.01% returns since its inception. In comparison, its default MySuper strategy posted a one-year 19.34% amid an equity bull run, and a 9.25% return since its inception.
NET-ZERO PROPERTY
Sustainability was also a key focus as the fund was among the first super funds in 2019 to make a net-zero property portfolio commitment by 2030.
“Property has been seen to make a contribution to greenhouse gas emissions of 40%. As the owner of those properties and the way you design them, and the way that you source the energy, if you can drive the operations of those properties to net zero earlier, then by virtue of that you're actually assisting in creating the demand and also creating that transition. So we made that pledge,” he said.
As property owners, investors can take initiatives such as influencing external managers to set similar targets, or issue a mass tender for energy which can improve return outcomes “because you are buying but also creating a market to stimulate further renewable energy.”
“When you have a stronger focus on efficiency, tied to those loans, you bring it into the operations of other buildings. And so even with established buildings, we're able to lift the sustainability ratings,” he said.
INFRASTRUCTURE AS A SERVICE
In terms of infrastructure, he said the fund learned to think about it as a physical asset that provides a service to the community.
“So it's not just a physical thing, but it's actually a service that we provide. And then how you provide that service and how you line it up with the customers starts to create that connection around longer-term returns.”
“One of the features of infrastructure, in some cases, is that it is regulated. So there's often a mechanism where an authority will look at what you do, look at your cost of capital and determine how much profit you can make. And again, if you can actually demonstrate that by investing money in a particular way, you're going to create either better service or more resilience, then you're going to get a regulatory outcome that's favourable, which then goes to creating jobs in terms of efficiencies. But just as importantly, from the asset owners’ point of view, you're able to create returns as well,” he added.
However, he cautioned that sustainability does have an impact on returns. “But the more we look at it, we actually find a lot of commonalities between managing an asset well, with a view to longer term outcomes, and actually getting recognised and rewarded from that from a return point of view.”
ROLE OF INSURANCE
City Developments Limited
At the same panel, Esther An, the chief sustainability officer of Singapore real estate firm City Developments Limited, said that the formation of the Net-Zero Insurance Alliance in 2019 played an important role for building owners.
“Insurance premiums get so high, and some buildings that are subject to very high climate threats may not be even insurable. So, there's also issues about stranded assets, and also about the financial impact if the premiums go sky high,” she said.
Other alliances such as the Net-Zero Asset Owner Alliance and the Net-Zero Banking Alliance, and the Glasgow Financial Alliance for Net-Zero have also been impacted and pointed to the direction that ESG had “exploded into the mainstream,” she said.
An also underscored the importance of “better buildings” in Asean. The United Nations Sustainability Development Goals are fundamentally aimed at helping developing nations, she said.
“And as we all know, Asean accounts for the third-largest population and has been undergoing fast [growth]… With a fast-growing population, you need better infrastructure, better buildings, especially when you're talking about the younger generation. Asean has about more than 60% of the population that is relatively young – 35 and below. These are the populations that will aspire for more sustainable products and buildings.”