Pension funds and investment managers at the IPE Real Estate Global Conference & Awards in Amsterdam this week agreed that environmental, social and governance (ESG) factors should play an integral part in real estate risk management and portfolio resilience, but concerns were raised about relying on building codes.
In a panel session on ESG and portfolio resilience, Frans Heijbel, head of international real assets at Sweden鈥檚 largest occupational pension fund Alecta, said: 鈥淚t鈥檚 a given that we need to factor into the investment decision, so we think it鈥檚 definitely a source of alpha.鈥�
Leading the discussion, John McKinlay, CEO for Canada at LaSalle Investment Management, said ESG should 鈥渁bsolutely鈥� play a role in making real estate portfolios resilient ahead of an economic slowdown.
鈥淚f there鈥檚 any opportunity to harden your assets for any climactic event in advance of such a thing, you should accelerate that,鈥� he said.
Tony Brown, global head of real estate at M&G Real Estate, said the fund manager had a 鈥渉uge responsibility鈥� to make sure assets were resilient from an environmental and social perspective.
鈥淚f you look at the Paris Agreement, it assumes that pretty much all buildings by 2050 have to be carbon neutral in operations. We鈥檙e nowhere near that now,鈥� he said.
Elizabeth Yee, vice president, Resilience Finance, 100 Resilient Cities, spoke in favour of investors acting to protect the environment beyond their own assets.
鈥淚 would push the room to think more broadly about how we鈥檙e thinking about resiliency,鈥� she said. 鈥淎s opposed to thinking specifically about buildings, thinking about how those assets actually contribute to the overall resilience, the systemic resilience of a city,鈥� she said.
Hans Op鈥檛 Veld, head of responsible investment at Dutch pensions manager PGGM said ESG factors formed part of real estate risk management.
鈥淲hat you鈥檙e trying to do is intentionally improving, beyond good risk management,鈥� he said.
Meanwhile Jenny Buck, head of private markets at Tesco Pension Investment, said her sceptical side wondered to what extent real estate investors were making the shift because they were being forced into it.
鈥淔rom an economic point of view we know there are going to be fiscal challenges and regulation sets,鈥� she said. 鈥淚f I鈥檓 honest about it all the stuff we鈥檙e doing, we鈥檙e doing it because we鈥檙e arguably being defensive against some of the regulations that I think our societies will put on us.鈥�
Op鈥檛 Veld also argued in favour of institutional real estate investors acting both on a broader scale and longer-term to mitigate climate risks.
鈥淔irst of all flooding risk tends to be a weather event, which is fine and you can look at your portfolio, but do remind yourself most of the damage will be somewhere else where people are unable to pay for that damage, and it鈥檚 in Indonesia and around the equator where the problems will be.
鈥淚f you truly want to be responsible investor, and I would like to think we would like to be that, they need to think both about transition risk as well as the physical risk,鈥� he said.
Of these, the transition risk was the trickier one, he said, and that just relying on standards set by building codes will 鈥渘ot suffice鈥�.
He said: 鈥淲hat is a personal frustration of mine is that apparently we as institutional investors are still unable to demand from our developers and our builders to build not only to the current code but to a more stringent code.鈥�
But investors were potentially able to do that, he said, adding: 鈥淚 think it鈥檚 potentially a return-enhancer in a world of low returns.鈥�
Brown said it was important for governments to get their environmental building regulations right.
鈥淭hose cities that really push the agenda on the code for buildings and environmental and social resilience 鈥� I think those are going to be the cities that get our money, those who are really pushing the boundaries on code,鈥� he said.
