Investors Gauge Risks, Opportunities in ESG Factors

Environmental, Social and Governance factors are growing more important in both initial investment decisions and ongoing monitoring after investment, said UBS Asset Management, Zurich, Switzerland.

“Investors should identify and address material ESG risks and opportunities, both prior to investment and during the ownership period not only when investing directly, but also indirectly,” said the firm’s Green News & Views report.

Investors often make indirect investments into commercial real estate by purchasing units in a fund that invests on behalf of many people, the report said. “The purpose of performing due diligence is to make sure investors into the underlying fund are getting what they are paying for and to understand any risks the investment may be (or may become) exposed to. Through performing due diligence, investors can also assess the potential for improvements, identify legacy issues and analyze the impact of ESG (and other) trends across the underlying assets, ultimately affecting the risk/return profile and likely future performance of an investment.”

UBS noted ESG factors have long been important to investors looking for sustainable investment opportunities. “However, ESG is no longer just a ‘nice to have’ addition pursued by a minority, it is now mainstream and expected of all institutional investors and their clients,” the report said.

UBS said the benefits of “proactive and positive” ESG policies include:

–Reduced risk of regulatory non-compliance. “For example, new EU regulations will require fund managers and non-EU fund managers marketing funds in the EU to make new disclosures related to sustainability,” the report said. “Regulatory risk of obsolescence (for example being unable to sell or lease a building if it rates poorly on an environmental basis) is also growing.

–Competitive positioning. Sustainable assets are gaining attention from investors pursuing strategies that consider environmental factors, UBS said. “This in turn is starting to be reflected in pricing of real estate in certain markets globally,” the report said. “Furthermore, there is huge value at risk (and price discounts) in assets that are not managed or considered sustainable, which may be a result of their physical location (for example at risk of sea-level rises) or the building quality (and therefore energy efficiency).”

–Reduced expenses and improved returns. “Sustainable real estate not only benefits the environment through reduced use of natural resources, it can preserve/increase asset value (through lower void lengths, lower obsolescence, reduced depreciation, reduced operating costs, better tenant covenants and higher tenant retention),” the report said. It noted 60 percent of investors recently surveyed by PRI said ESG affected prices paid/offered on assets. For investors that have ESG targets, due diligence helps them assess how an asset might effect those goals, the report said.

“For example, if one of those targets is to reduce energy consumption or carbon emissions across their portfolio, then acquiring an energy-inefficient building (or a fund containing energy inefficient buildings) will impact the ability to reach that target,” UBS said. “Therefore, an ESG-driven investment strategy can be a crucial step to help investors enhance the environmental and financial performance of their assets, as well as the future value of their portfolios.”