The joint APG Asset Management, PGGM Investments and the Universities Superannuation Scheme study carried out by the University of Maastricht into the environmental impact of real estate investments was far more than a courageous step. It was a ground-breaking initiative that has since helped shape theinstitutional real estate investment market.
The rationale behind the study was to provide an objective and uniform set of environmental data served as a starting point for all involved in the real estate sector, as well as academics and policy makers in the discussion on how to optimally monitor and improve the environmental performance of the commercial real estate sector. The highest ranked companies and funds in the report were then regarded as best practice performers serving as an environmental benchmark for their lower ranked peers.
From an investment perspective, an increased focus on energy efficiency and sustainability implied resolving a market inefficiency and better building management, such as lighting, cooling, heating technology and better insulation. However, these investments were thus far hindered by barriers, such as a dearth of financing mechanisms and a lack of information and market awareness on the merits of energy efficiency, among both building owners and their financiers.
But to enhance their green credentials, real estate investors need to consider more than just their investment portfolios. From a societal perspective, attention to the environmental performance of real estate investments is important, because the commercial real estate sector is among the largest consumers of natural resources and one of the heaviest polluters in terms of greenhouse gas emissions and waste production. Thus, the property industry can play a major role in reducing global energy, resource consumption and in limiting greenhouse gas emissions.
However, the study revealed that it might not be that hard for pension schemes to adopt a more environmentally friendly and socially responsible stance in their real estate investment strategies, with most funds now allocating close to 10% of their portfolio to real assets.
Some might wonder why adopting a greener stance in real estate investments is a relatively new concept, given that socially responsible investing has been applied to more mainstream asset classes for some time now. The APG/PGGM/USS partnership suggests that there are several reasons for this:
- real estate investors were not yet engaging in large-scale energy efficiency investments because they are not aware of the profitable investment opportunities hidden in their buildings
- the market had not yet created the mechanisms and products to finance investments in energy efficiency
- the market did not provide the right incentives for building owners and managers to invest in improving the energy performance of their holdings
- market turmoil at the time diverted the attention of property investors and managers to resolving short-term but immediate and seemingly more important issues.
The authors of this ground-breaking work explain that without detailed information on the behaviour and environmental performance of the global property sector, investments in property funds and companies cannot be assessed on environmental grounds, which, in turn, inhibits a responsible real estate investment strategy from being effectively implemented. Their work led to innovative avant-garde practical solutions on which to base further developments in this field.