Sustainable real estate investing: navigating trends and leveraging sustainable technology in 2023

Sustainable real estate investing is table stakes for real assets. The EVORA Global Insights into Real Estate Investment Sustainability (IRIS) 2023 report reveals a wealth of valuable insight from investors representing a sizeable chunk of professionally managed global real estate. Read on to discover emerging trends in ESG market maturity, ESG data, and climate resilience – and find out how sustainable software can support your investment.

ESG market maturity trends for sustainable real estate investing in 2023

High ESG standards raise the bar

The sustainable real estate market is growing quickly, with key players setting the bar for integrating environmental, social, and governance (ESG) considerations throughout the investment process. According to the EVORA Global IRIS 2023 report, which includes survey responses from investors managing a combined $3.3 trillion in assets under management (AUM), one-third of global investors are spearheading this trend. Investors with over $20 billion in AUM are at the forefront of sustainable practices, while an increasing number of investors with $5 billion or more in AUM are close behind. Driving this shift in sustainable real estate investing are clearer sustainable finance regulations, escalating investor scrutiny, legal interpretation, and the increased likelihood of reputational damage and financial penalties. Further implementation of the EU SFDR in 2023 could be a major contributor to this change, with leasing and the impact of risk factors on cash flow (such as the energy crisis in Europe) playing key roles. New disclosure rules in the US and other major financial markets, combined with greater scrutiny of greenwashing by the Financial Conduct Authority (FCA) in the UK, will drive this trend across a wider geography.

Leverage sustainable technology for compliant regulatory reporting

To comply with these increasingly stringent regulations, the sustainable real estate investment sector can leverage purpose-built technology platforms. For example, sustainability data management solutions like SIERA can provide robust inbuilt regulatory reporting capabilities to facilitate the collection, management, and disclosure of investment-grade ESG client data to complete disclosure reporting. Asset managers and financial institutions will soon be able to access the SIERA sustainability data management solution to facilitate the preparation of Principle Adverse Impact (PAI) disclosure reports for the 2023 EU SFDR submissions. Leveraging sustainability technology in this way increases efficiency, reduces the time and resources required to prepare and process the regulatory and compliance reports, and diminishes the risk of errors and inconsistencies.

Reduce ESG risk for resilient investment decisions

ESG risks to income and reputation are key to investment value, driving deeper ESG integration across the lifecycle for sustainable real estate investing. This is especially true within the Investment Committee and Board Governance, and during asset ownership and management. In fact, ESG representation on Investment Committees and ESG-linked incentives are on the rise. Notably, 55% of Investment Committees now have ESG representatives, with 38% holding voting rights. This shows that most investors are embedding ESG risk in their investment decisions. Capacity is also building across all scales of investment, with ESG training programmes in place or in planning in the vast majority (75%) of investment firms. Upskilling relevant staff in ESG regulations and integration is seen as essential both to drive strategic decision-making and to assess ESG risk on investments. Large investors are busy gathering ESG data and conducting early due diligence at the research/strategy and deal-sourcing stage to limit ESG risk exposure. By taking the time to understand operational risks and the need for sustainable asset management now, large investors are one step ahead when it comes to releasing riskier assets. While large investors are making their first moves, the rest of the market is still pricing up the risk. This means large investors can turn their eye to climate risk exposure, vulnerability, and adaptability.

Leverage sustainable technology for resilient investment decisions

Here, the sustainable real estate investment sector can leverage sustainability technology platforms like SIERA to reveal what energy consumption data and carbon emissions data is missing at each asset and across your entire fund. Sustainability software solutions can intelligently gap-fill incomplete data sets based on your existing data and benchmark data representative of your asset’s floor area and building type. In doing so, sustainability technology automatically highlights whether your assets are at risk of stranding according to global decarbonisation pathways. It then facilitates data-driven action-based or target-based pathways to optimise the energy and carbon performance of those ‘stranded assets’ for more resilience in relation to climate-related price adjustments and reputational risk. Keeping data close at hand also supports collaborative decision-making and reporting between property, asset, fund, and sustainability managers, so everyone is working from one version of the truth on one sustainability technology platform.

Integrate ESG across the investment lifecycle

ESG integration is rapidly becoming a must-have for large investors, with market leaders setting the standard for ESG integration across the investment lifecycle. With growing pressure from regulators, increased scrutiny from institutional investors, and a growing awareness of the risks and opportunities associated with ESG, investors of all sizes need to take note and follow the lead of the largest in 2023. Sustainability technology accelerates this roadmap.

ESG data trends for sustainable real estate investing in 2023

Make data-driven investment decisions

The use of ESG data in decision-making for sustainable real estate investing is on the rise, with a significant 94% of investors saying it’s essential to their investments. Half of investors are integrating ESG data into asset-level financial models, and more than 80% of large investors (greater than $50bn AUM) are using ESG data points across all categories. This includes ESG strategy, reporting, peer benchmarking and operational efficiency, investment decision-making, and meeting regulatory requirements. Nearly all large investors (greater than $5bn AUM) are integrating ESG data into financial models. When it comes to sustainability technology like SIERA, detailed asset and aggregated fund analytics form its backbone. Users can find in-depth ESG data and insight via visual dashboards for an overall fund performance view through to more granular meter-level data completeness for targeted actions.

Differentiate with a standardised approach and investment-grade data

However, there is a lack of standardisation in the way ESG data is collected and integrated into investment models, which creates a barrier to its widespread adoption as a crucial component of investment decision-making. To overcome this, a market-wide method of pricing ESG risk into investment value is needed to shift a from a “good to have” mentality to a “must have” mentality. And despite the growing use of ESG data, investors are concerned about the quality of that data. Only one in 10 investors surveyed expressed confidence in the value of their data. This is likely due to a lack of investment and automation in data acquisition, as well as a lack of standardisation in integrating ESG into investment models. Real estate asset data acquisition itself remains a challenge, with only 7% of real estate ESG data being automated. This highlights a reliance on third-party data, with larger investors being more reliant on it. Additionally, one third of data collection is still manual, which can lead to errors and inconsistencies. And around 60% of investors do not capture ESG data on indoor health conditions such as daylight, air quality, and thermal comfort. Although a marked improvement on previous years, this is a cause for concern and should be improved in 2023. Transactions in the real estate sector are expected to face a higher level of ESG risk scrutiny from institutional investors and larger investment managers. Good data is needed to back up ESG claims and avoid accusations of greenwashing. As such, investment-grade information stays a key differentiator going forward. In 2023, the real estate sector needs to understand the strengths and weaknesses of the various non-standardised approaches to ESG data from a fiduciary standpoint.

ESG climate resilience trends for sustainable real estate investing in 2023

Reputational risk is the top perceived ESG and climate risk among investors for sustainable real estate investing. The dangers of greenwashing are a clear and present danger. Financial authorities are writing to let investment managers know they will be taking a closer supervisory look at green claims. Direct financial risks are leasing (including rental level or attractiveness to tenants), cash flow (operating costs and income), and increased depreciation for non-resilient assets. However, sustainable property management and climate-resilient locations still lead resilience strategies for larger investors. And green buildings are front of mind for all investors when protecting future asset value.

Infuse physical climate risk into investment strategies

Almost half of investors have witnessed extreme weather and physical climate risk affecting their investments through changes in capital value, income projections, default rates, and occupancy voids, along with increasing insurance costs. In fact, the increasing cost of insurance is a pressing concern for investors. Large geographically diverse portfolios are particularly vulnerable to climate risk, and yet, despite this, many investors have not yet fully incorporated climate risk and resilience into their investment strategies. Almost four in ten large investors are unable to show that investment transaction prices have been adjusted for climate risk and resilience credentials in the past 12 months. This highlights the need for investors to take a more initiative-taking approach to incorporating climate risk and resilience into their investment strategies. In doing so, these investors will better protect their assets and ensure long-term financial stability. Sustainability technology now provides purpose-built physical climate risk solutions driven by industry-leading data, so you can view each asset according to its potential risk factors and assess its appetite for investment.

Build green to attract investment and occupancy

Green design is the spine of best-in-class building to future-proof asset value. An emerging high priority for investors in 2023, green building may well knock sustainable property management and climate-resilient locations off top spot. Around 80% of large investors (greater than $5bn AUM) believe the biggest opportunity arising from climate resilience will be increased investment and tenant demand for green buildings. Two-thirds of investors also believe demand for renewables and onsite energy generation will increase to reduce scope 2 emissions. Sustainability technology like SIERA can track fund and asset-level carbon emissions to measure the positive impact of green design when buying or selling buildings. Another key aspect is its ability to manage and track improvement actions plans for assets that currently fail to align with science-based targets.

Keep vigil on carbon pricing, crediting, and trading

Two thirds of large investors have an internal carbon price in place or plan to introduce one. In contrast, almost two thirds of small investors have no intention to do so, unless it becomes a legal obligation. This highlights the disparity in approach between large and small investors when it comes to carbon pricing. If most investors do not price internal carbon into existing investments and carbon is then priced through regulations like the EU’s new carbon border tax, a price shock could ripple through the market. It’s one to watch. Almost half of large investors are also buying or developing carbon credits to offset emissions from their investments. As carbon markets evolve in 2023 and beyond, global governments are predicted to build carbon exchanges to trade carbon credits. This could lead to a shift in carbon credit offsetting. However, offsetting comes with a cost, but no financial return-on-investment for sustainable real estate investing. Could carbon insetting be the new ‘in’? Answers on a postcard… Contact our team to kick-start your strategy for sustainable real estate investing and download IRIS 2023 for a deeper dive into our insight.