Does ESG Matter To The Bottom Line?

By Christian Bernasconi, Managing Director, B&I Capital

Today, every fund manager is confronted with the question: “How does your firm integrate environment, social and governance (ESG) standards into your company and your investment process?”

Like the U.S.-based National Association of Real Estate Investment Trusts (NAREIT), we at B&I Capital define ESG as environmental sustainability, social impact and good governance. Over the years, we have seen companies advancing the ESG agenda across their investment portfolios. A 2018 Forbes article said that last year, ESG investing is estimated at over $20 trillion in Assets Under Management (AUM) or around a quarter of all professionally managed assets around the world.

The Global ESG Real Estate Survey Results publication, a new report authored by U.S. Bentall Kennedy, Canada’s RealPac and the United Nations Environment Programme Finance Initiative (UNEP FI), showed that the vast majority of respondents are taking ESG considerations into account for acquisitions. The report, which surveyed 40 respondents with an aggregate AUM exceeding US$1 trillion, also revealed that ESG is used as a lever to lower risk, and that tenants and owners are expected to demand more from asset managers to address climate risk. “The findings offer a unique perspective and evidence base of the progress being made to mainstream ESG within large institutions, and that a strong platform exists for producing even greater positive changes within the sector to accelerate the decarbonisation of buildings and improve resiliency in alignment with the Paris Climate Agreement,” says the UNEP FI, which launched the report in August.

A separate research commissioned by HSBC revealed that nearly 50% of the businesses that the bank surveyed had ESG strategies.

The Sustainability Premium

Investors, meanwhile, are also inclined to place a premium on sustainability. Notably, a Morgan Stanley survey showed that 72% of surveyed investors believe that companies with good ESG practices can achieve higher profitability and are better longterm investments.

At B&I Capital, we first started formalising our ESG policies and procedures about two years ago, but the process is a continuous evolution.

We conduct hundreds of one-on-one meetings with REITs in our universe. These meetings give us the ability to assess management in a way that third-party ESG rating firms cannot as they often rely on self-reporting from the companies that they assess.

Our assessments here at B&I make us believe that REITs with the best corporate governance will also voluntarily invest in their properties to reduce environmental impacts. They will also invest in their employees and will support their communities as management teams understand that sustainability will lead to strong performance. These ESG frameworks translate not only to reputational value but also to the company’s bottom line.

According to the HSBC survey, ESG investments, on average, perform at least 2% better than traditional products across four measures: uptake or demand, financial returns, shareholder/ investor engagement and reputation.

While the B&I Capital board is very keen on a company’s direction and reputation in our investment decisions, we also note that ESG practices improve profitability. This strategy of combining ESG requirements with investments and operations is a win-win for investors who are looking for assets that are delivering both social responsibility and income generation.

The implementation of ESG standards have a direct impact on a company’s financial performance as it optimises the firm’s operating performances and reduces its overall operating costs. Morgan Stanley’s sustainability assessment in 2015 cited an instance where through a shift in focus on better ESG implementation, one large technology firm saved US$422 million and reduced electricity use by 5.8 billion kilowatt-hours over a 12-year period.

Lowers Risk

As such, it makes good business sense to invest in ESG standards, particularly for real estate companies in Asia. In Japan, LaSelle LOGIPORT REIT announced earlier this year that two of its properties have attained the highest certification rank of five stars from the Japanese Building-Housing Energy-Efficiency Labeling System. In Australia, Vicinity Centres is aiming for net zero carbon by 2030 across its 34 wholly-owned shopping centres. Singapore REITs are also not far behind. Fraser Centrepoint Trust just completed its Global Real Estate Sustainability Benchmark (GRESB) survey and will now be assessed by GRESB.

In August, Sembcorp Industries and Cache Logistics Trust announced the successful completion of an 8.0 megawatt-peak rooftop solar farm built, owned and operated by Sembcorp at three logistics warehouses in Singapore owned by Cache.

CapitaLand also announced that it is installing around 20,000 solar panels atop six of its Singapore properties by the end of 2019. This could potentially be the largest combined rooftop solar facility in the country by a real estate company.

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GRESB said in its report entitled The Business Case for ESG in Real Estate that companies with a comprehensive sustainability strategy and data management platform are positioned to be “ahead of the curve.” They are readily able to adapt to meet local environmental regulatory compliance standards and avoid fines and penalties as well as potential reputational risk.

Beyond operating expenses and risk management, other social standards, particularly on health and safety of tenants and employees, also bode well for a company’s bottom-line and stock prices as they bring good reputation and brand awareness for the company.

In an article published in NAREIT, Kilroy Realty Corp.’s Senior Vice President of Sustainability Sara Neff said features that focus on health and productivity, such as open stairwells, lowemitting construction materials and overall investment in skill improvements for employees and staff “translate to the bottom line and are more material than quantifiable energy savings.”

“The gains from the productivity of your employees can dwarf your utility bill,” she said.

As for the social aspect of ESG, B&I Capital believe that strong corporate governance often results in management that pays attention to the sustainability of its assets, transparency in reporting, alignments of interests with all stakeholders, tenants, employees and society at large.

When we consider a firm’s corporate governance, it is not just from the position of an investor.

We believe the sustainability of a business is achieved when the interests of all parties can be aligned. How a REIT management interacts with its investors, maintains its properties, manages its tenants and suppliers are all crucial factors.

 

About the author:

Christian Bernasconi is a Founding Partner of B&I Capital AG based in Singapore with over 20 years of experience as an Asian and Japanese equities specialist and has been based in Switzerland and Singapore over his career. Before co-founding B&I Capital in 2007,  Bernasconi was an Executive Director at UBS and established the Japan and Asian Equity Sales platform, and was part of the Global Real Estate (RE) Team in Zurich. Prior to joining UBS in 2000,  Bernasconi was with W.I. Carr Far East Limited, Paribas Asia Equity, and Yamaichi Securities. He is based in Singapore for B&I Capital.