Bain & Company's 2020 private equity report showed the significant growth of impact investing with a 154% increase in assets acquired since 2015, as well as an increase in the size of funds raised. ESG investing is a real consideration and it is being embedded in companies' corporate strategies, as James Duncan explains.
This represents a shift to "moral capitalism" and a definite tipping point has been reached: while corporates must show how their operations impact profits, they must also demonstrate how they affect the environment, society and the wellbeing of their workforce.
There has been some scepticism about ESG investing but far from just creating social value, responsible investing has been shown to return profit for investors and shareholders - an important point in galvanising the real estate industry.
Historically the property sector has operated with its eyes firmly on the bottom line. But the market is beginning to recognise how it needs to evolve to stay relevant and to understand that ESG principles are vital for the industry to be sustainable in the long term."
Historically the property sector has operated with its eyes firmly on the bottom line. But the market is beginning to recognise how it needs to evolve to stay relevant and to understand that ESG principles are vital for the industry to be sustainable in the long term.
Legal & General Investment Management (LGIM) Real Assets is a case in point: it is providing homes for homeless families in partnership with Croydon Council, deploying £100m of UK pension money directly into developing affordable housing and backing its pension promises with social investment - what it terms "inclusive capitalism."
Property, people and purpose
Property - our homes, workplaces, public spaces, cultural hubs and parks - plays a significant role in the fabric of society. There is a real social impact as a result of building in communities and the real estate industry has a responsibility to the places and spaces it creates. As a sector we cannot shy away from the environmental impact of construction, and those that do will be left behind as legislation and regulation catch up with public opinion.
Housebuilders and their supply chains are now focusing on how the built environment can innovate to become greener through more efficient and sustainable construction methods and mitigating emissions from homes and commercial buildings.
Investors in real estate have a fantastic opportunity to marry their financial targets with ESG objectives - clearly there is significant social value to what property is delivering. Understandably, institutional investors are putting increasing emphasis on the need to measure social impact to guide investment.
However, systems can vary considerably, making it difficult for investors to compare like-for-like. Consequently, many in the sector advocate a standardised measurement system and with companies' methodology and reporting processes still in their infancies there is time to shape them for the property sector.
Social value needs flexibility
Measuring impact means assessing outcomes and understanding what ‘value' really means. The developer that rents out space to a community group or charity traditionally may have evaluated it solely in terms of how much rental value the space is worth to them as a landlord, but if that space is used to educate children then how do you capture and quantify that positive social - and long-term socio-economic - impact?
While investors want certainty around the framework and need certainty over the social value of their real estate assets, a rigidly objective approach to measuring the impact of property portfolios would miss the mark. Each project's circumstances are different, so rating sites or developers based on arbitrary targets for social infrastructure or environmental emissions would lack the flexibility required to account for local issues and community priorities.
Investors and developers would benefit far more from a kitemark system, which would reflect the quality of individual investments. It would give investors the tools to assess the respective social impact merits of individual projects and investments in an informed way.
If taken up by the industry, it would provide the benchmark by which the social credentials of such projects and investments are judged, and show councils, investors, operators and residents what socially valuable investment looks like.
A useful mechanism to build on may be similar to the process proposed in January's Living with Beauty report from the Building Better, Building Beautiful Commission. This recommends a similar system for design standards - which are as subjective as social impact - and provides a framework for how the initiative may work.
Used properly a kitemark system could help speed up both delivery and investment decisions by the real estate sector as it continues to learn and evolve to support increasingly socially and environmentally conscious business objectives.
We've already seen property industry bodies, representing more than £1.6trn of commercial property, establish a universal set of ESG principles for the sector, acknowledging its collective responsibility to society and the steps it needs to take so that it is not left behind.
But these are not mandatory targets and so it remains to be seen just how the property industry will embrace social value so that it works for investors and for-profit businesses, as well as for communities. Using a kitemark system would clearly identify the best and most socially responsible operators in the sector providing investors, and residents, confidence that what is being brought forward is what is best for local people, the local environment - and ultimately, investment returns.
James Duncan is head of real estate investment at Winckworth Sherwood