In the early days of sustainable development, many actions were described as sustainable without any concrete evidence or results to demonstrate it. The greenwashing illusion was common. The world of real estate investment was not immune to it.
However, the continued efforts of European and national legislators and collective awareness have increasingly challenged these practices, in particular through more stringent transparency obligations and the introduction of more and more standards for measuring impact.
In addition, investors, both institutional and private, are looking for meaning in their investments and opt for responsible products in their investment strategy. In June 2020, 85% said that they either wanted to move their portfolios more towards ESG (Environmental, Social and Governance) funds, or that they were already fully involved in them [*]. Real estate, with its great impact on the environment and its significant societal role, must participate in this transparency effort, where managing and reporting on ESG actions will strengthen investor confidence, and enable tangible action to be taken to achieve, in 2050, the goal of carbon neutrality set by the Paris Agreement.
The ESG approach applied to real estate investment
First, let’s start with a simple definition: what is an ESG product in real estate investment? The integration of ESG criteria (Environment, Social and Governance) is largely acknowledged in the financial sector and allows its investments to be positioned according to non-financial criteria. For example, investing in companies that work for the environment or with social impact. Applied to real estate, this means investing in real estate where ESG actions are taken to reduce the environmental impact of the asset and/or strengthen its social impact, all the while accompanied by enhanced governance.
In this respect, BNP Paribas Real Estate Investment Management distinguishes between several types of fund:
- All real estate funds comply with ESG standards, including an ESG assessment for any asset acquisition.
- Real estate funds with a roadmap that includes ESG objectives.
- Real estate funds that formally integrate ESG objectives and commitments into the fund’s legal documents.
- Real estate funds with a social or environmental impact, where the nature of the buildings themselves has a big impact, such as investing in a property that has energy self-sufficiency.
At the dawn of the implementation of the European Disclosure Regulation, which aims for greater transparency in the financial sector, what are the challenges for responsible real estate investment funds? How do you make greenwashing a thing of the past?
ESG criteria are integrated into real estate investment at several levels. None of the players in the value chain should be overlooked, since all are responsible for the ESG strategy that is implemented. At a first level, the portfolio management company has a key role because, based on its preferences and guided by the increasing regulations and investor requirements, it defines the CSR strategy (Corporate Social Responsibility) which will channel its major decisions and investment strategies for all the products it manages. At a second level, these same preferences define the ESG strategy for each real estate portfolio. Finally, on a third level, all these ESG practices are carried out at the real estate asset level. And that is the particular nature of real estate, which, unlike a stock exchange share, is tangible and discernible. Any action taken to improve the ESG performance of a real estate asset is measurable and can be communicated transparently to investors. Furthermore, investors are involved in defining the various ESG strategies and a roadmap is established to monitor the performance indicators of the relevant fund and real estate assets, year after year.
One of the keys to avoiding any illusion of greenwashing is the collection of data at the property level in order to provide investors with accurate reporting on steps taken and the achievement of the objectives in question. Because it is only by managing ESG data, such as energy consumption and behaviour within a building, that it will be possible to demonstrate its environmental and social performance. Only an evidence-based strategy will ensure an asset is responsible. For this, you need to be able to talk about the costs incurred and to present clear performance indicators.
If stakeholders in a real estate investment fund have set themselves the objective of reducing the energy consumption of the fund's real estate assets, the consumption is recorded year-on-year and monitored in order to identify progress being made as part of a continuous improvement process. Corrective action is systematically integrated into action plans associated with the annual work plans.
The collection stage is the most important because it is the most difficult, as tenants sometimes do not want to share their data with their landlord. Close collaboration with tenants is therefore essential to gather data from both the communal and private parts of the building.
Today, the challenge for real estate is in the existing building stock, for two reasons.
1. Land in big cities is scarce.
2. It is in old buildings that the scope for progress is the largest and, ultimately, has significant results. The best lever for economic and environmental performance is the improvement or renovation of existing buildings.
For several years now, the European Union has been regulating the financial sector, both to encourage it to focus its investments on projects with a high environmental or social impact, and to improve the transparency of financially responsible products. With effect from 10 March 2021, the European Disclosure Regulation will come into force. It imposes new reporting and communication obligations on portfolio management companies. In addition, the European Taxonomy Regulation defines the various types of economic activity that are considered sustainable.
These regulations will encourage systematic reporting to investors that shows them how ESG risks are considered in investment decisions and whether products that claim to be sustainable are achieving ESG objectives. For institutional investors, this will allow greater differentiation of ESG products in a market that is becoming increasingly competitive. Private investors, for their part, will be able to direct their investments more easily towards responsible products.
These regulations are essential for creating a coercive framework for investor activity and, further, for enhancing transparency around responsible investing. However, in the face of the global climate emergency, the financial and real estate sectors must now go further than simply complying with the letter of the law and set ambitious ESG commitments and objectives, with regular reporting that demonstrates the progress being made.
For this reason, in December 2020, BNP Paribas Real Estate Investment Management launched the European Impact Property Fund (EIPF), the first real estate impact fund in Europe that aims to comply with the Paris Agreement. It aims to reduce greenhouse gas emissions by 40% across its European portfolio, over a 10-year horizon, thanks to the improvement of the environmental performance of existing buildings through CAPEX and OPEX activity.