Indeed, there have been significant improvements in recent years in ESG disclosure and initiatives within the industry. In the US, for example, which has historically not been as strong in ESG disclosure, almost all the top 100 US REITs now report ESG publicly, while two-thirds of them issue an annual stand-alone sustainability report. Areas such as tenant engagement and employee wellbeing have also seen improvement.
Within the real estate sector overall – which takes in REITs, real estate operating companies and property developers – REITs have achieved the best average ESG risk rating, while developers have fared the worst.
One area that needs further improvement among REITs globally is the tracking and disclosure of carbon targets and emissions, energy and water usage, and waste management data. We expect this reporting to continue to improve in the future as investors place increasing attention on ESG, particularly the “E” and “S” as part of responsible investing.
According to the World Green Building Council, buildings are currently responsible for 39 per cent of global carbon emissions, and one of the main ESG challenges for the industry is the reduction of the carbon impact through the whole life cycle of a building.
So far, the focus has been primarily on reducing operational carbon emissions by reducing energy usage. However, more effort will be required to reduce the carbon footprint of a building during the “use” phase of its life cycle. But making a difference in areas such as maintenance, repair and refurbishment will take a fundamental change in the approach to building design and waste reduction.
There is also the issue of upfront carbon, which is emitted in the materials production and construction phases of a building. This is more relevant for property developers than REITs, but it’s something the whole industry needs to consider. According to estimates, more than half of total carbon emissions released during the whole life cycle of buildings constructed between 2020 and 2050 will be due to upfront carbon.
Taking into account ESG factors is an increasingly important part of any investment process. As new challenges evolve, so too do the quality of data, transparency of information and increase in regulation. This presents both opportunities and challenges for the investment industry, including within the global listed real estate asset class.
Chris Bedingfield, portfolio manager, Quay Global Investors