Joanna Turner examines how both internal and external governance processes are shaping sustainable property investment.
Governance, as the third pillar of ESG, is an essential component underpinning the framework of ESG investment and management. Over the past five years, against a background of increased awareness of climate change, ESG investing has continued to accelerate, generating a raft of new regulation.
In fact, according to a study by the Institute of International Finance, more than 2,000 regulatory developments regarding ESG in the financial sector came about in the few years up to March 2020 alone. These cover a plethora of issues from climate and environmental risk, disclosure obligations to social risk management standards.
Yet due to the sheer number and complexity of the ESG regulations, as well as their non-standardised nature globally, there is considerable uncertainty about how they should be implemented by individual financial services organisations and companies.
The institutional real estate sector is no stranger to regulation of its own, suppliers and customers’ business operations and management, as well as non-mandatory guidelines, all of which increasingly address ESG issues.
Internal governance issues affecting real estate
For large corporate organisations, internal governance of ESG includes not only specific policies and strategies but also management boards and committees dedicated to overseeing all ESG matters within the organisation. These can cover:
- Environment: targeting net zero carbon emissions and reducing energy usage in property assets
- Social impact: diversity, equity and inclusion (DEI) and workforce issues
- Stewardship and external engagement with tenants, customers and suppliers, and corporate governance
However, putting a corporate governance framework in place is meaningless without adherence to the procedures that have been put in place. Failure to adhere, or to accurately disclose an organisation’s exposure to ESG-related risks and how they are managed, brings about reputational risk for the organisations involved – possibly even for the entire industry. It can also – as has recently been seen in the wider financial services industry – lead to potential accusations of ‘greenwashing’ and substantial fines being issued by the regulators for false or misleading claims.
At Canada Life Asset Management, in addition to having a diverse management body, we have set up an ESG Oversight Committee, made up of senior members of staff from across the different asset classes. There is also a dedicated real estate ESG Steering Group, which meets regularly to review all aspects of ESG related to our real estate investments and business operations. In this way, we ensure that ESG matters, rather than acting as a separate function, are embedded into all our activities and processes.
External regulatory and governance commitments
As an organisation, we also comply with a diverse range of external regulatory ESG requirements and guidelines, as well as reporting and disclosure of organisational ESG-related activities.
One example of an external regulatory ESG requirement is the FCA requirement for firms to make disclosures aligned to the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD), which aims to make companies’ climate-related disclosures more consistent and therefore more comparable. We have just published our first TCFD report, which includes our commitment to mitigate the impact of climate change on all our investments and to improve reporting disclosures. This is in conjunction with the publication last year of our Real-Estate Net Zero Carbon Roadmap, where we committed to achieving net zero carbon across our direct real estate portfolio by 2050 or sooner, and to becoming operationally net zero for all our real estate assets by 2030. Progress against those targets can be found here.
In addition, our LF Canlife UK Property ACS has participated in the annual Global Real Estate Sustainability Benchmark (GRESB) since 2019, having increased its overall score from 67 out of 100 in 2019 to 77 in 2021, earning it 3 green stars. This is above its UK peer group average of 69 out of 100, with the fund scoring the maximum 30 out of 30 for our management of ESG. Another of our key property funds, the UK Income Annuity Property Fund, has been in the GRESB benchmark since 2020 and improved its score to 71 out of 100 in 2021, with our management also scoring the maximum 30 points.
We are committed to embedding ESG strategies and processes across our real estate and wider asset management businesses, to manage risk and achieve our long-term investment goals. To prove our commitment and increase engagement with the wider external investment industry, we have joined the Institutional Investors Group on Climate Change (IIGCC), Climate Action 100+ and the UK Sustainable Investment and Finance Association. We are just beginning to navigate how these organisations operate and understand the benefits that collaboration with them can bring.
New regulations and tighter governance procedures lie ahead
As ESG in the financial services industry is still emerging as a major investment theme, the uncertainty regarding governance and regulatory requirements is worsened by the lack of standardisation of data in internal corporate risk models and external ESG benchmarks.
This is a topic which I will be exploring further in a subsequent article. There is no doubt that tighter scrutiny of internal governance systems and procedures related to ESG in the industry is on its way, and that more external regulations will be created, to improve and streamline existing regulations and accelerate the pathway to a cleaner, more diverse, net zero carbon future.
The value of investments may fall as well as rise and investors may not get back the amount invested.
The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors.
No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness.
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. This document is issued for information only by Canada Life Asset Management.
This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the regulated fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www.canadalifeassetmanagement.co.uk/
The LF Canlife UK Property ACS is an Authorised Contractual Scheme and is suitable for institutional and professional investors. The fund invests in assets that may at times be hard to sell. This means that there may be occasions when you experience a delay or receive less than you might otherwise expect when selling your investment. For more information on risks see the prospectus and key investor information document.
Requests for redemptions of units are subject to a notice period of up to 185 days. In normal market conditions this notice period is waived at the discretion of the manager and units can be sold without giving notice. The value of property is generally a matter of a valuer’s opinion rather than fact. Costs of buying and selling real property are generally much higher than for other types of assets. Property investments may be subject to significantly wider price spreads than bonds and equities which could affect the valuation of the fund by up to 8.00%.
Please note that while Canada Life Asset Management Limited and Canada Life Limited are regulated as stated below, outside of regulated funds, 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
 ‘Sustainable Finance Policy & Regulation: The Case for Greater International Alignment’, Institute of International Finance, March 2020