The world’s leading real estate investors are committed to environmental, social, and governance (ESG) measures to mitigate risk and to help make a positive impact.
The ULI Asia Pacific Summit brought together a panel of investors and managers with nearly $500 billion of owned or managed real estate to discuss the importance of ESG issues to the industry. Panelists agreed that ESG had acquired momentum in real estate but noted that standards vary around the world, with Europe now leading the way.
However, global real estate investors can play a role in driving the adoption of higher standards, said Peter Ballon, managing director and global head of real estate at the Canada Pension Plan Investment Board (CPPIB). Global investors “do not change their practices as they go around the world,” he said. “We don’t lower the bar when we go to another country where maybe the bar is lower.”
In Japan, ESG practices are an extension of the traditional way of doing business, said Kazunari Yaguchi, senior managing director and head of the real estate investment department at Japan Post Bank.
“Japanese firms tend to consider not only shareholders’ interest, but also the interest of other stakeholders such as customers, neighbors, government, and employees,” he said. “However, ESG requires two further groups to be considered—future generations and people living elsewhere, as ESG requires us to work with others.”
The panelists agreed that the pressure on real estate to do better on ESG issues is coming from all sides: it has become a primary topic of concern for investors, occupiers, and governments.
Session moderator Sonny Kalsi, chief executive officer of BentallGreenOak, noted that ESG considerations will require a change of mind-set for shorter-term holders of real estate, whereas long-term core real estate investors are already concerned with the whole life cycle of the asset. “Even if you are a short-term holder of an asset, the likelihood is you will sell to a long-term owner,” he said.
Yaguchi noted that it is hard to quantify the risk and value of ESG measures in real estate and that more certification is needed. Ballon said CPPIB looks at ESG from the risk side as much as the return side. “ESG risk makes an asset illiquid, shrinking the buyer pool,” he said.
“ESG is completely aligned with delivering great results,” said Kathleen McCarthy, global co-head of real estate at Blackstone Group. She also agreed that ESG measures are an element of risk mitigation. Insurance companies are increasingly concerned about climate resilience in buildings, and this will affect costs and investment underwriting, she said.
BentallGreenOak recently turned down an investment opportunity in Southeast Florida in response to concerns about future flooding risk, Kalsi said.
McCarthy also talked about net-zero targets, saying Blackstone is assessing whether to implement such a target for real estate, or perhaps even a more aggressive target. One company in Blackstone’s portfolio is already set to achieve net-zero status by 2025, she said.
McCarthy and Kalsi agreed that the most important aspect of the social part in ESG for their firms is diversity and inclusion. Both companies have programs to ensure a more diverse range of employees, and Bentall GreenOak has committed to making two-thirds of its new hires women and minorities.