Property investors in the Asia Pacific and Europe have emphasized the ESG challenges associated with real assets such as property, even as fund managers in Europe and the US face a crackdown from regulators and investors worldwide over greenwashing.
Robert-Jan Foortse, head of European property investments at APG, the Dutch pension fund, told AsianInvestor that it had worked to improve ESG measurement of direct investments, including in Asia, as well as increasing monitoring of external managers to ensure that claims about ESG impact are justified.
“We use external verification via benchmarking tools such as the GRESB assessment and green buildings certification to evaluate our managers’ ESG performance,” he said, referring to an independent organization that supplies performance data and peer benchmarks.
“Moreover, we have built a proprietary asset level database enabling us to do our own in-house assessment of various ESG factors at a property level. For example, we utilize the CRREM [Carbon Risk Real Estate Monitor] pathways, coupled with our internal asset level database to monitor the transition risk of our real estate investments,” he added.
Stephen Gilmore, CIO of the New Zealand Superannuation Fund (NZ Super) said a particular focus of the fund when selecting external ESG managers was culture.
“Great cultures – the way [managers] do things – is the one thing I would point to when it comes to selection,” he said.
Regulators in Europe and the US have been cracking down on greenwashing by investment managers. In June, the US SEC handed the first major enforcement action in the form of a fine to BNY Mellon. In September 2021, 63 of 125 asset management firms were found to have failed to meet beefed-up requirements under the UK’s latest stewardship code.
Gilmore said that managers across the board have shown a growing awareness of the importance of improving policies around ESG measurement and implementation recently.
NZ Super sees affordable housing as an opportunity to achieve socially meaningful investments at the same time as posting sound investment returns. The fund is currently focusing its investing in New Zealand but Gilmore said it was looking at opportunities abroad, where the size of social-housing sectors makes them attractive.
“Some other markets may be more developed and mature, meaning it is easier to get those investments off the ground,” he said. He added that lessons from offshore markets might then be helpful in informing local investments, pointing to strong returns from some of its renewable energy investments overseas as well as from other investments related to financing the energy transition.
Between July and September, NZ Super shifted the universe from which it selects $25 billion of passive investments in global equities to two MSCI market indices aligned with the 2015 Paris Agreement on climate change – a change designed to improve ESG profile of the portfolio.
Gilmore said that the move was designed to capture social benefits, alongside emissions reductions: “The aim was to improve the entire ESG profile, not just have a Paris-aligned index.”
While the social impact of investing is often difficult to evaluate – ESG measures are typically concentrated in environmental factors – this dimension is becoming increasingly important to investors in residential property, Mary Power, principal consultant and head of the property research team at Jana Investment Advisors in Melbourne, told AsianInvestor.
As the question of affordability for tenants and home owners across the world becomes more important, she said, this was likely to continue.
“Whether its affordable housing or social housing, housing is a fundamental necessity. In the ownership market and the rental market there is a lot of pressure,” Power said.
“That is going to be an issue globally, you have to be able to house people,” she added, pointing to increasing importance of the issue in China, a country that has seen large scale urbanisation and high levels of speculative investment in housing.
NUANCES TO FORESTRY SECTOR
Recent years have seen growing opportunities for investors in forestry to receive both returns and environmental benefits through carbon offset programs. However, investors and fund managers also told AsianInvestor the complexity of measuring the ESG impact of forestry assets means the benefits are not always clear.
Gilmore said NZ Super had no plans to increase allocations to its forestry assets, despite their strong recent performance and opportunities for impact investing provided by a growing carbon offset market.
“Carbon credit schemes can be of value for new forests, but for established assets you have to think about what happens when you cut [trees] down. This added risk that comes with the benefit makes the asset class a bit more nuanced,” he said.
Turning large areas of land over to tree planting may also carry social risks, for example where it means that jobs associated with the land’s previous use, such as agriculture or sport, are lost.
Jason Baggaley, deputy head of value add funds at abrdn in London, manages the abrdn Property Income Trust, a UK real estate investment trust with a portfolio value of £544 million, which bought 1,447 hectares of upland in the Scottish Highlands for carbon capture and rewilding in September 2021.
“An attraction of the site to us was that there were no people living on the site, and there was no direct employment. Previous uses for grouse shooting and stalking had declined,” he said.