A new surveyby PwC identified an exponential increase in the asset and wealth management industry’s desire for environmental, social, and governance–oriented (ESG) investments: in the United States alone, assets under management are projected to double from $4.5 trillion in 2021 to $10.5 trillion in 2026. At the same time, asset managers report being challenged to create enough new funds to keep up with the demand, giving an edge to real estate firms with strong sustainability programs.
The survey of 250 institutional investors and 250 asset managers found a high level of interest in ESG products around the world. However, incorporating ESG has escalated compliance costs for asset managers by more than 10 percent.
“One of the challenges that many real estate owners grapple with is that they don’t have access to tenant-controlled energy consumption unless the tenants are in a fully serviced lease,” says Billy Grayson, executive vice president for centers and initiatives at the Urban Land Institute. “Figuring out a common way to collect and analyze utility data is key to bringing compliance costs down and helping owners and tenants work together to better manage energy consumption.”
Adding to the complexity is the increasing number of regulatory bodies laying out requirements for owners to get to net zero carbon. “In the United States, over 30 cities have developed climate action plans and are starting to require disclosure of energy and greenhouse gas emissions, and many of them have slightly different regulations and data collection responsibilities,” Grayson says.
Much depends on the U.S. Securities and Exchange Commission’s (SEC) forthcoming new rule on climate disclosure, Grayson added. “Many people are waiting to see what the next major disclosure requirement is going to ask of them, and they’re making proactive investments to prepare for the final SEC rule. Harmonization around key material metrics, climate mitigation measures, and the path to net zero in real estate would help reduce compliance costs and help investors, regulators, and other stakeholders make more informed decisions.”
Technological tools for assessing climate risk have also proliferated, adding another challenge: “Based on their assumptions on physical risk, value at risk, and costs to mitigate this risk, three different climate risk tools might give three different levels of risk for the same property,” Grayson notes. “But institutional investors are starting to use these tools, and many regulators will be asking for this data. Even if the tools are giving different information, they’re still giving good directionality that helps inform which assets to take a look at.”
Although the costs of compliance may be going up, the costs of not complying are also increasing as buildings’ energy use comes under greater scrutiny. “Some buildings that value-engineered away some of the ESG enhancements are now being forced to look at retrofits,” says Byron Carlock, national partner and real estate practice leader for PwC. “Some of the new energy management systems are expensive, but they also reduce your operating costs going forward.”
The demand for greater incorporation of ESG goals is high among tenants as well, Carlock notes. “Tenants are willing to pay higher rents for the A+ properties that are going the extra mile to deliver in terms of architecture, design, amenities, and environmental sensitivity. There’s a big rent disparity between those buildings and the ones that are not yet compliant with those expectations.”
For investors, ESG funds can also prove more profitable. The PwC survey found that 60 percent of investors reported higher yields from their ESG funds, and that more than 75 percent would be willing to pay higher fees for those funds. “We’re seeing plenty of impact funds under management deliver very good returns, and the impact portion of asset management under management continues to grow,” Carlock says. “It’s especially important to millennials who are inheriting money and looking to deploy it in investments different from those of previous generations.”
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