Improved climate for Impact Investing

July 1, 2019

Investors’ increasing awareness of Environmental, Social and Governance (ESG) issues is shifting to climate change risks. In addition, investors shift from awareness to pro-active impact investing. This has already fueled strong growth in sustainable investment products—such as green bonds and unlisted green funds.

Real estate constitutes a relatively small fraction of ESG investment products. One reason for this might be that real estate investors lack clear standards and definitions for sustainable investing compared to other asset types. In response, the recently created EU Technical Expert Group on Sustainable Finance is developing a consistent classification system and an EU label for green financial products.

GRESB Real Estate Assessment Participants

Sources: GRESB, FTSE Russell, AEW

In real estate, we have seen the global GRESB fund-benchmarking reach over €1 trillion in European AUM. But, at the same time the emergence of a large number of building-specific certifications globally has also created confusion among both investors and occupiers as each of these mostly national certifications are not based on consistent methodologies. The real estate investment management industry will therefore have to embrace more detailed and consistent reporting and further innovation to meet investors’ increasingly pro-active ESG requirements.

GRESB Benchmark challenged by more precise Green REIT Index

GRESB has become mainstream as an ESG real estate fund benchmark, with the number of funds covered increasing from 198 in 2010 to 903 in 2018. Europe is the most represented region in GRESB with 446 real estate funds, totaling USD $979 billion of GAV. However, the recently launched FTSE EPRA Nareit Developed Green Index enables investors to integrate climate risk and shows that investors do not need to sacrifice returns to invest in green certified and energy efficient buildings. By using building-level data it can also avoid potential bias in a self-reporting survey like GRESB.

Share of Certified Green Office Buildings

Sources: CBRE, University of Maastricht, MSCI, AEW

Penetration of building environmental certification varies across Europe

European cities with historic city centres tend to have a low share of their office stock certified. Lack of consistency across local environmental labels limits comparability across markets across the region, let alone globally. The share of certified buildings has nevertheless increased as institutional investors’ requirements have evolved. As an example, around 9% of the office stock in Paris is currently certified, compared to just 0.1% in 2007. Certified office buildings command higher actual rents (+1.4%) and estimated rental value (+5.8%) than high-end non-certified office buildings according to evidence from the French market. The rent differential is likely to widen as large occupiers increasingly require certification.

Irène Fossé

Associate Director Research & Strategy – AEW

Hans Vrensen

Managing Director, Head of Research & Strategy – AEW