Highlighting the S in ESG

Of the three strands of ESG - environmental, social and governance - it is probably the social that has so far received least attention from real estate investors. This is something that INREV will be addressing in 2019, with the aim on raising members' awareness of the area and proposing ways the industry can best measure the value of incorporating social effects into the investment process. 

Interest in impact investing is gaining momentum among investors  

But what do we mean by ‘social’ in the context of non- listed real estate investment? This is something that IQ discussed recently with Maaike Hof, Senior Fund Manager for International Real Estate & Impact Investing at the Dutch pensions provider MN. Hof has recently joined the INREV Sustainability Committee and also focuses on social issues in her day-to-day work.

‘Speaking from my own perspective, I would identify three particular areas as important social effects of real estate investment,’ she explains. ‘These also relate to the UN Principles for Responsible Investment (UNPRI), which cover the rights, well-being and interests of people and communities. ‘In this context, rights can be thought of as including general human and labour rights, with implications for the kind of tenants that investors are willing to see occupy their assets and also the types of organisation involved in the construction supply chain. Then, well-being has really come into its own recently under the heading of HWB (health and well-being), which refers to the effect buildings have on those using them. Finally, the interests of people and communities can include activities such as providing affordable housing for them, something that can be done via impact investing, for example.’

The wider effects of real estate investment on people and communities are also becoming increasingly important to investors

Hof’s organisation currently pursues impact investing across four main ESG themes – affordable housing, energy transition, access to finance and circular economy – although affordable housing is the primary social focus at present for real estate. ‘Impact investing for real estate is very much in its infancy in Europe,’ says Hof, ‘and I’m not aware of many organisations that have yet followed this path. Still, among investors, interest in this area is gaining momentum alongside growing attention from policy-makers throughout Europe.’

Returning to other social areas that are likely to grow in importance as objectives for real estate investment, the health and well-being of building occupants is one that the INREV Sustainability Committee already has in its sights. This is evidenced by INREV training webinars on the subject and the inclusion of tenant satisfaction and liaison in the best practice recommendations of the INREV Guidelines. At the same time, many organisations have started incorporating HWB strategies, both for their investment assets and for their own organisations, with considerable value being  found through the linkage of HWB to productivity and tenant longevity.

‘The wider effects of real estate investment on people and communities are also becoming increasingly important to investors,’ says Hof, ‘although challenges remain in how to integrate them into an investing structure. Such effects aren’t just relevant to construction supply chains, where one might want to ensure that each company embraces corporate social responsibility – something that can vary greatly from one country to another – but also to the tenancy profile. For example, investors may enact a policy of excluding armaments producers as tenants within their direct portfolios, as part of the process of implementing an ethical investment strategy. Such strategies do however
become increasingly challenging to apply for indirect holdings – it very much depends on the policies adopted by the managers concerned.’

The wider effects of real estate investment on people and communities are also becoming increasingly important to investors

Clearly these areas of activity just give a taste of what the social element of ESG could potentially cover, but much more will no doubt emerge once the INREV Sustainability Committee tightens its focus on the subject over the year to come. The committee has already started making strides towards expanding industry resources on the subject, including the recently launched Global ESG Library, webinars and research papers. Analysing best practices in the industry and enhancing the relevant ESG guidelines are likely to be key further steps. At the same time the Committee plans to collaborate with other industry organisations to ensure the treatment of ‘social’ goes forward on a broad front.