Influence of ESG factors on the performance of private equity real estate funds in APAC

Fund managers remain focussed on financial performance amidst growing interest in sustainability

Sustainability has been gaining traction as a concept in recent times. Nonetheless, fund managers appear to be primarily still interested in the bottom line, building the case for understanding the relationship between ESG factors and financial returns. The linkage between the two domains has been unclear within the private equity real estate fund industry, given the relatively young nature of the topic of sustainability and the paucity of data available. Correspondingly, a study was conducted to uncover the possible influence of ESG factors, in collaboration with Asian Association for Investors in Non-listed Real Estate Vehicles (ANREV) and Global Real Estate Sustainability Benchmark (GRESB).

Historical data reveals that ESG performance and fund performance are positively correlated overall

Combining historical ANREV and GRESB data (2012-2017), it was found that fund performance improves by 0.852% for every 10-point increase in overall ESG score. A positive association continues to be observed even after controlling for variables such as gross asset value (GAV), gearing, sector, geography and reporting year, corroborating findings from a meta-study of over 2000 related academic papers by Friede et al. (2015) which investigated the relationship between ESG and financial performance. Of the seven studies related to real estate, all of them found a non-negative relationship, with five reporting a positive correlation.

Environmental factors appear to have the strongest positive association with fund performance among the three broad pillars of E, S, and G

Taking a step further, more recent GRESB data (2020) was used to analyse the relationship between ESG factors and fund performance on a more granular level, revealing interesting trend insights using an approximate fund performance proxy. The E pillar was found to be the most positively and highly correlated with the proxy among the three pillars E, S and G, after controlling for the effect of year and fund manager.

Deeper analysis suggests what matters

Delving deeper, ESG performance was next viewed in terms of 14 constituent components identified by GRESB as factors governing specific material issues in sustainability performance, and the top 5 component scores which displayed the most positive correlation with the fund performance proxy include (1) energy score (2) tenants and community score (3) reporting score (4) risk assessment score, and (5) building certificate score. This was made possible with GRESB’s revision in benchmarking standards in 2020, which identified 14 sub-components of the ESG score.

For more detail on what exactly contributes to the different scores, see:

Summary of study and limitations

Historical ANREV/GRESB data suggest the possible positive influence of ESG factors on fund performance overall. More granularly, it was found that the E pillar had the most positive correlation with fund performance among the three broad pillars of E, S and G. It was then further found that building energy efficiency, tenants & community impact / engagement, good reporting practices, proactive risk assessment, and compliance to green building certification requirements are all factors that are positively associated to fund performance. That said, data limitations exist in this study. Notably, a proxy for fund performance was used for the deeper level analyses due to the unavailability of the latest ANREV/GRESB combined dataset (2020), which may affect the accuracy of the material issues identified. Nonetheless, it is believed that the study still provides valid trend insights, given the strong correlation observed between the proxy and fund performance.

This article was written by Jeslyn Ng, an alumnus of the National University of Singapore (NUS). The featured content is extracted from an undergraduate paper written with the kind support and sponsorship of ANREV and GRESB and the author would like to thank all parties involved.

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