Written for WealthDFM by Mark Brennan, Partner, Foresight Capital Management
As advisors’ focus increasingly turns towards sustainable models and sustainability focused portfolios, the ability to allocate meaningfully to alternatives without compromising on ESG considerations is more important than ever to achieve the diversification often necessitated by the current interest rate environment and inflation concerns. Amongst endless products offering sustainable equities and fixed income investment, genuine sustainable offerings in the alternatives sector are few and far between.
For real estate, understanding around ESG integration is often limited. ESG commonly conjures up images of vast wind farms and solar panels, however it is much less intuitive to link together the real estate sector and sustainability concerns. However, a quiet revolution is reshaping the real estate industry as the interest in sustainability rapidly increases and expands beyond the environmental concerns usually voiced by market participants to include social and governance issues as well.
Of course, environmental energy efficiency and solar panels on roofs play their part. But sustainable real estate encompasses much more than that, and investors should be considering a broad range of ways in which real estate can have a positive impact on sustainability outcomes, for example its impact on healthcare and communities, or advancing industrialisation of distribution and other sub sectors. This is in addition to the usual climate concerns.
Alignment of interests
As interest in ESG investing develops, there is a growing realisation amongst real estate CFOs  that they will inevitably be punished by capital markets over the medium and long term if they are not raising the bar when it comes to sustainability. This alignment of financial and non-financial objectives is now more pronounced than in recent history. For investors, this means investing in real estate companies that are, amongst other things, getting the best access to capital (perhaps in the form of green bond issuances or sustainability linked lending). Long-term access to high-quality, cheaper capital will ultimately be won by real estate companies that can demonstrate ambitious sustainability initiatives and can execute against them.
Tenant-led change
It is important to note that a lot of the changes in real estate are being driven by demands from tenants. Â Tenants are rapidly evolving their demands to maintain sustainability credentials and appease shareholders, with requirements spanning everything from best-in-class waste management facilities to renewable energy provision. As industrial business continues to grapple with rising energy costs, energy efficiency in particular has taken centre stage for businesses looking to reduce consumption.
Positioning yourself at the front edge of the market in this regard is becoming a vital considering as the looming prospect of stranded assets becomes more and more apparent. Retrofitting and keeping pace with regulatory change presents an enormous cost to real estate owners in legacy assets, and so investing in those companies at the leading edge of this trend means they are reaping the benefits rather than going through the cost cycle.
The move towards non-traditional sectors
Amongst those sub sectors leading the way in sustainability outcomes are several non-traditional areas. Moving beyond the traditional real estate sectors such as retail and offices is key to maximising the impact of investments. Especially in the UK, investors would do well to consider healthcare assets, logistics and data centres among others. A holistic approach to sustainability means that just as much weight can be given to AI and robotics’ impact on distribution warehouses, or the localisation of primary healthcare delivery in communities, as having a building delivering best-in-class energy performance. These issues and others are continuing to change the face of real estate, and staying on top of these trends will be key for investors in the sector throughout 2022 and beyond.
