Saving the Environment and Improving Your Portfolio with Real Estate

Author: 
Mamadou-Abou Sarr and Julia Kochetygova
Friday, January 20, 2017

The right real estate investments can have a surprisingly positive impact on the environment

Buildings account for about a third of total carbon emissions globally. This presents a real opportunity for investors who seek to maintain a diversified portfolio and contribute to improving the environment. The most sustainable real estate companies may also turn out to be high performing real estate investments. Northern Trust Asset Management’s Mamadou-Abou Sarr, global head of ESG, and Julia Kochetygova, senior ESG research analyst, explain.

Why is real estate such a large contributor to greenhouse gas emissions?

Kochetygova: Buildings use electricity for lighting and cooling and most of them use fossil fuels for heat, making the real estate sector a significant energy user and greenhouse gas producer that contributes to global warming. Globally, building operations and construction account for about a third of total carbon emissions. Therefore, energy efficiency becomes a top sustainability issue in this sector.

And what are other ESG issues that this sector is responsible for?

Sarr: Real estate companies are responsible for affordable housing, safety, the well-being of tenants, employees and communities surrounding their assets. These are significant social issues. There is a strong connection between health and the indoor spaces where we spend most of our days. Also, many real estate companies are involved in new construction or remodeling, where safety is a top issue. Investors have the opportunity to require that real estate companies follow responsible social and environmental practices that improve the quality of their buildings and lead to financial success.

Do sustainable real estate companies do better than their less sustainable counterparts?

Sarr: An interesting 2015 study* in the Journal of Portfolio Management found that buildings in North America with sustainable practices had higher rents and occupancy than buildings without them.

Kochetygova: When a property is positioned for sale, sustainable measures such as better indoor environmental quality, onsite renewable energy and efficient lighting, heating, ventilation and air conditioning systems can be leveraged to enhance the property’s marketability and maximize value. These measures will also reduce the property’s expense ratios over the holding period, which benefits owners and tenants.
Is there interest from investors in real estate investment trusts (REITS) with an ESG focus?

Kochetygova: We have seen strong interest from investors to understand which companies have sustainable practices in this sector. We believe sustainable practices not only have a big impact on long-term financial success, but investors also are concerned about how their investments reflect on their reputation and duties to their clients.

Sarr: Even more, investors want to use robust and independent assessments of the ESG quality of companies. This is particularly important for the listed real estate investment trusts, the primary option for equity investors to get exposure to property assets. Back in in 2009, a group of large pension funds started the Global Real Estate Sustainability Benchmark (GRESB) — an industry-driven organization responsible for assessing and rating the ESG performance of listed and private real estate funds.

How does GRESB rate the companies they consider?

Kochetygova: Each year, GRESB invites real estate companies to participate in a questionnaire to assess their ESG practices. They ask about the policies and principles real estate funds use to make decisions and metrics that show how decisions and plans are put into effect along with the results.

Sarr: With the information from the questionnaire, the firm evaluates real estate funds, ranks them and assigns ratings of 1 to 5 based on their rankings. The top rating of 5 stars means the real estate firm is in the top 20% of the ranking, while 4 stars is next 20% and so on. The GRESB assessment provides the basis for the systematic evaluation of investment strategies.

How can investors get exposure to sustainable real estate?

Kochetygova: Historically, to get exposure to responsible or sustainable real estate companies you would have to hold physical assets or use an active fund. Now, through collaboration with GRESB and Thomson Reuters, Northern Trust Asset Management has created a Developed Real Estate ESG Index administered by Thomson Reuters. This index is exclusively available to Northern Trust investors either through a cost effective and transparent UCITS fund or using a separately managed account. This allows investors to combine Northern Trust’s nearly three decades of experience in sustainable investing, the unique expertise of GRESB in assessing real estate investments, and the robust index services of Thomson Reuters.

How is the Northern Trust GRESB Developed Real Estate ESG Index built?

Sarr: In order to get included into the Northern Trust GRESB Developed Real Estate ESG Index, companies need to report to GRESB at least once in the last three years and not receive the lowest rating of 1 star. They also must pass stringent index liquidity and investability criteria.

Dutch Investors

Please consider registering for an event on February 6 to learn more about this index solution.

*Nils Kok and Avis Devine. “Green Certification and Building Performance: Implications for Tangibles and Intangibles”. Journal of Portfolio Management. September 2015. The study found that LEED and BOMA BEST certified buildings in the U.S. had net effective rents 3.7% higher than similar non-certified buildings; occupancy rates were 18.7% higher in Canadian buildings having both LEED and BOMA BEST certification, and 9.5% higher in U.S. buildings with ENERGY STAR certification, than in buildings without certifications; and energy consumption per square foot was 14% lower in U.S. LEED certified properties than in buildings without certification.

www.northerntrust.com

IMPORTANT INFORMATION: This material is for information purposes only. The views expressed are those of the author(s) as of the date noted and not necessarily of the Corporation and are subject to change based on market or other conditions without notice. The information should not be construed as investment advice or a recommendation to buy or sell any security or investment product.
Past performance is no guarantee of future results. All material has been obtained from sources believed to be reliable, but the accuracy, completeness and interpretation cannot be guaranteed. The information does not constitute investment advice or a recommendation to buy or sell any security and is subject to change without notice. Investments can go up as well as down.

Current or prospective clients should under no circumstances rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. Information contained herein is current as of the date appearing in this material only and is subject to change without notice.

© 2017 Northern Trust Corporation. Head Office: 50 South LaSalle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulation. For more information, read our legal and regulatory information about individual market offices (available at northerntrust.com/disclosures). Northern Trust Asset Management comprises Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc. and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company. In Singapore, Northern Trust Global Investments Limited (NTGIL) and Northern Trust Investments, Inc. are exempt from the requirement to hold a Financial Adviser’s Licence under the Financial Advisers Act and a Capital Markets Services Licence under the Securities and Futures Act with respect to the provision of financial services. In Australia, NTGIL is exempt from the requirement to hold an Australian Financial Services Licence under the Corporations Act 2001 in respect to the provision of financial services. NTGIL is regulated by the FCA under U.K. laws, which differ from Australian Laws. Issued by Northern Trust Global Investments Limited.