The year ahead is an exciting time for the Real Asset universe and, guess what, the pace of change is accelerating.
Against an ever-changing global political backdrop, new and evolving investment models including the rise of BTR and the imminent challenge of Brexit, the real estate market must continue to yield consistent returns for investors.
And, if all this wasn’t enough to deal with, Millennials and Generation Zs are asking and expecting more transparency from the funds that they are trusting to keep their wealth safe for the future. But the questions are fair ones. Who wouldn’t want to know that their investment is tied-up in a secure, responsibly-managed asset that is leaving, at worst, a very light imprint on the planet? Surely, it’s not unreasonable to ask?
Up until this point, materiality has been of increasing importance in the creation of CR, CSR & ESG reports, with companies and funds keen to demonstrate their performance against a range of criteria that are relevant to their business operations, selected either internally or by the larger stakeholders. This in a sense is the starting point, with funds first focusing on the impacts that are the most known and pertinent. However as reporting moves into maturity, it is right and natural to expect a wider breadth of CR information to be shared.
In my opinion, the recent era of more engaged investors and stakeholders is driving the market towards a new point that goes far beyond the traditional materiality approach. Interested parties now have the right to understand the imprint of a real estate fund in a much more thorough sense. Let’s call this new focus, Totality.
Totality
Totality is an understanding of the full impact of an operation (and not in selected areas only). It is the right to access crystal-clear, transparent, impartially-audited and robust footprint data linked to business operations. It will not only provide more clarity on the existing set of key performance metrics, but also extend to a broader set of ESG issues, as well as presenting the information in a very simplified and clear data format.
I guess the question now becomes, what might some of these new reporting topics be? Standing back and being able to have regular discussions with CRE Investors about the new topics of interest to them, it is possible to write a very long list of emerging issues, but the following seem to be rising to the top to be aware of for 2019 and beyond:
Climate change and business resilience
Climate change and business resilience are two interlinked issues that are always near the top of the hot topics list. Are you able to show that your asset can withstand the impacts of a changing weather pattern, for example, and are your tenant interests protected enough such that they can continue to operate their business as conditions change? It’s not unreasonable to believe that any asset not able to withstand this change is higher risk to the investor and if not managed carefully could devalue very quickly, wiping millions from asset capital values and rental yield.
In a similar way, there is a lot of discussion presently around the UN Sustainable Development Goals coming from the Paris Agreement, with major influencers in multi-billion parent investment funds talking about the need to measure ‘Paris Proofness’ in all the assets that they own. This is an excellent way forward for fund reporting as it is a concept that unifies us all and is very easy to understand. As a result, I would expect to see asset tools such as BREEAM In-Use adding these new kinds of reporting outputs into their existing systems very soon. Ultimately it is a simple measure of ‘come 2030 will my assets and operation be fully sustainable?’ Having said that, perhaps we could all try for a little earlier?
Circularity
Circularity, the circular economy and closed-loop systems are also strong contenders for ESG issue of the year in 2019. There has been a lot of discussion on these, particularly in the Netherlands which is so often one of leading real estate markets in terms of new thinking around ESG.
As an example, a new strategic framework has been developed through a collaboration with our business partners the Dutch Green Building Council (DGBC), Metabolic, SGS Search and Circle Economy that defines circular buildings. It describes indicators that could be included in BREEAM to better evaluate circular buildings and their reduced impacts.
According to several web sources, a copy of the new report (sponsored by the Redevco Foundation) was presented to Shamir Ghumra, our Director of BREEAM, on 9 October 2018 at Expo Real in Munich. The report includes a framework for defining circular buildings and concepts for developing measurable indicators. The essential indicators that define a building’s circularity were developed by an expert group with six indicators developed in more detail. The indicators will be field-tested in follow-on studies and I would expect to see the focus on this topic growing strongly throughout 2019 into 2020.
Water looping and maximisation, air pollution and quality
Water looping and maximization, along with air pollution and quality, are another two topics rising in importance. Traditionally, water use has been one of those topics that
Under a new regime of totality, water suddenly becomes much more important as organizations rise up a little and think about global challenges they can help to mitigate as opposed to just their local ones. The same can be said for air quality or pollution as well as deforestation too. Remember, in an era of totality, it’s ok to think about our global neighbours a little more and perhaps help them with their challenges.
Of course, no blog piece on real estate ESG futures would be complete without a mention of digital systems. How else, after all, will we measure, record and analyze the complex data streams to produce elementally simple metrics and ‘one dashboard that tells all’? The rise of the machine is no less in this context. We can expect to see the impact of machine-learning on monitoring and targeting systems as they become evermore intuitive to our needs, whilst perhaps also enabling the holy grail for all Asset Managers, true and complete tenant engagement.
I’m sure we are not far away from digital twins of real assets locking up tenant satisfaction feedback into a blockchain of information that is sold as part of a disposal transaction? Perhaps that is one for 2020. Who knows?
What we can be sure of though is it’s going to be quick, it needs to be transparent and it needs to be based on verified data. Slightly scary to think of really, when some tenanted areas don’t even have an energy sub-meter yet in many of the existing buildings already out there. Perhaps installing a meter is a job for February then to kick things off…
All views are Author’s own.
James Fisher, Head of Real Assets, BREEAM, BRE