The smart money is with sustainable listed real estate

In investing parlance, sustainability isn’t just a catch-all phrase for the numbers that don’t carry dollar signs. It refers to substantial elements of the ability of a business to perform over the longer term. For real estate, predicated as it is on rental income and the balance between supply and demand, our view is that sustainability factors almost always have considerable impact on performance over shorter time frames as well as the long term.

Our investment philosophy is high quality outperforms over the life of the real estate cycle. Assessing quality is therefore the first step in our bottom-up investment process, allowing us to understand the firm’s long-term trajectory and delivery on its fundamentals and assessing ESG is a central component in that evaluation process

A number of factors go into scoring each of the components that make up a company’s ESG (environmental, social and governance) assessments. Many of these are unique to real estate, or have a relevance in the sector that may not be present elsewhere. Here are a select few attributes that we look for when considering whether a real estate company is forging strong ESG credentials for the long term.

1. They prioritise energy-efficient buildings

From an environmental point of view, our principal consideration is maximising the number of energy-efficient buildings in any given real estate portfolio. This has advantages for all concerned and future proofs long term cashflow. It often reduces costs for the tenant, in terms of outgoings for water and energy; it may also increase returns for the owner, whose property can access a larger pool of prospective tenants, who have a higher propensity to pay a premium rent for greener space and lower outgoings. Of course, the planet comes out ahead as well. Overall, this focus means that the carbon footprint of our investments is lower than comparable benchmarks in the sector.

2. They have a strong track record in safety

From a social aspect, safety is a critical indicator of the ongoing ability of a real estate business to carry out its future plans and meet its objectives especially in development. We go to great lengths to understand the track record of a company’s on-site construction from an occupational health and safety perspective, with the potential for adverse regulatory and industrial intervention in mind.

3. They have a strong, independent board

In terms of governance, we approach the issue from a minority shareholder’s perspective, so we assess board structures and the independence of directors with laser-like focus. In our experience, stronger boards and more effective governance equates to substantially better outcomes for all shareholders including minority shareholders like us over the long term.

Another important governance consideration is gender diversity. Too often there is a tendency to shelve this as purely a social issue, and to a large extent it is. More importantly, however, in this context the evidence shows that gender diversity on boards and in management teams has a positive effect on company performance¹.

Our listed real estate team love what they do. On a day-to-day basis we are fortunate to engage with some of the brightest and most entrepreneurial global real estate minds, and we find that almost universally they are in accord with the importance we place on ESG in our assessment of long-term value potential. For my part, I find it extremely comforting that the people charged with allocating capital in our real estate world are aligned on these issues, and I am certain that the cumulative effect will be enormous over the coming years.

¹ Example: https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity