In the first of a series of articles looking at the development of ESG in the property sector, we consider how and why the picture is changing, as well as Canada Life Asset Management’s role, as an established property investor.
ESG is nothing new to the property sector. Historically, this has related to the environmental aspect, relating to the effects of construction and building usage. However, in recent years, this picture has become more nuanced. The ‘S’ and the ‘G’ have come more to the fore, with an increasing focus on the sector’s impact on society, from employment opportunities to living and working conditions, and the overarching impact of effective governance - and how this can be implemented. What has driven these changes, and what are the likely next steps?
Mitigating environmental impacts
As an asset class, property is heavily exposed to the effects of ecological damage and pollution, and has been one of the world’s largest carbon emitters. This affects all types of assets, from housing to commercial buildings and infrastructure. Over time, the sector has become more mindful of its role in climate change throughout the whole building lifecycle - which typically lasts many years depending on the building’s purpose and use - from construction to demolition or re-use. Negative impacts associated with both existing and new buildings range from energy usage within the buildings, to construction materials, to the indirect effects of carbon emissions caused by transporting people, goods and materials to and from the assets.
In recent years the sector has gradually started to try to mitigate these impacts. For example, with the manufacturing of concrete and steel thought to be significant contributors in global carbon emissions, there has been a move towards timber as a more sustainable and environmentally-friendly construction material. Though not without its issues, such as restrictions on building heights, the adoption of timber has become more widespread and provides a lower-impact approach to property development.
The mega-trends driving ESG awareness
Over the past decade, several ‘mega-trends’ have led to an increased awareness of the importance of ESG factors in relation to the global property market. Chief among those is climate science, which has become increasingly embedded into the mainstream discourse. Global governments have shown increasing engagement with these issues, as highlighted by the negotiation of the Paris Agreement, which created a path towards climate action, at successive United Nations Climate Change Conferences.
The resultant push towards stricter regulation has been another key driver, with the introduction of the UN Principles of Responsible Investing and TCFD reporting underlining an increasing emphasis on transparency and due diligence in ESG matters. With further regulations due to reach the property market, insurers, and asset managers over the next few years, at both local and international level, it is clear that there is little option for companies to stand still.
This shift towards ESG awareness was only expedited during the global pandemic, which underlined the importance of investing in health and wellbeing strategies, and life science facilities (such as vaccination and research centres).
The outlook for ‘green’ property
With clients now empowered to seek clarity on a firm’s ESG credentials, failure to have a strong ESG strategy in place is increasingly becoming a hard barrier for investors. This is particularly true in the institutional space, such aslocal authority pension funds, many of whom will not invest with managers who cannot prove they meet their strict ESG criteria.
From a Canada Life Asset Management perspective, the ability to demonstrate our ESG strategy is becoming integral to marketing our products and services. The is particularly pertinent to the property team, where we have adopted benchmarks such as the Global ESG Benchmark for Real Assets (GRESB) as a means to highlight our annual improvement in these crucial areas.
We recognise the value that ESG brings to our customers, investors and society in general, as well as ourselves as an organisation. Operating as a more sustainable and socially responsible organisation is not only the right thing to do for the planet and society, but there is also a strong correlation between sustainability and improved financial returns. We believe that it will lead to improved risk management, increased product opportunities and a greater alignment with our client base and their values.
The value of investments may fall as well as rise and investors may not get back the amount invested.
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The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.
Please note that while Canada Life Asset Management Limited and Canada Life Limited are regulated as stated below, property management and the provision of commercial mortgages are not regulated activities.
Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.
Expiry date 30/09/23