Sustainable Investment: toward a clearer definition

INREV’s recently published Sustainable Investment Survey captures the views of seventy-five market participants, representing a total AUM of €2.2 trillion. The data highlights a range of perspectives that help bring clarity to the difficult question of how to define a sustainable investment. IQ spoke to Abigail Dean Head of Strategic Insights, Nuveen Real Assets, and Justin Travlos, Global Head of Responsible Investment, Axa IM Alts, both members of the INREV ESG Committee for their expert insights on the findings.

What was the original rationale for the survey?

Abigail Dean (AD): The industry is genuinely struggling to meet the SFDR requirements on disclosure. Certain key elements are open to interpretation – in particular the definition of what sustainable investment is within real estate. The ESG Committee also recognised that there is an understandable reluctance from many market participants to commit to reporting on the proportion of sustainable investments while there is still real confusion about the definition.

There were also other factors that we felt a survey could shed light on. We wanted to know the proportion of Real Estate funds in Articles 6, 8 and 9; and also, the proportion of sustainable investments that had already been reported in Article 8 vehicles. We also wanted to delve into some of the confusion around reporting against the ‘principle adverse impacts’ that are relevant to real estate.

Justin Travlos (JT): The intention of the survey was to garner some kind of convergence around what a sustainable investment looks like and for all of that information to be made available for everyone’s benefit, so that, as an industry, we have a reasonable level of reliance, and can all accord, on a particular set of base principles.

INREV – simply asking the question in its independent third-party voice – was a fantastic way to be able to allow its members to put forward their positions.

What do you think the key benefits of the survey have been so far?

AD: What the survey highlighted is that there are some key decisions to be made in constructing a sustainable investment definition that is relevant to an individual real estate product. These decisions relate to: identifying the contribution to a social or environmental objective, defining what the factors and thresholds are for the DNSH (‘do no significant harm’) assessment (which for some was purely the mandatory ‘principal adverse impacts’ but for others was more expansive), and the extent to which good governance should be applied to real estate investments. It’s been very helpful to see the different opinions on this.

JT: The survey has started the initial conversation at an industry scale, and I think the output of that has been tremendously helpful. There is very clear confusion across the industry about how specific requirements of the regulation might be applied. The most obvious of which is when you look at fossil fuel exposure.

What the survey is very helpful in doing is being able to articulate to three core groups what that confusion looks like. So, for investors, there’s a very clear message about being aware of what they’re looking at when they see the data [from managers] because it might not mean what they think it means. The view for the managers is, to make it very clear to your investors what they’re buying into and how it might be different from some of their other investments. And for regulators, it’s a very, very clear indicator that the lack of guidance in the regulation itself is causing confusion and is inefficient at directing capital towards, or away from, one particular outcome.
 

I don’t think there’s going to be a single definition of what constitutes a sustainable investment, because the range of products an investor would be investing in is so vast. I think the appropriate approach is that there’s a minimum threshold that has some constraint, and that managers are measured on what is additional to that threshold.

Is the industry agreed on a single definition of sustainable investment?

AD: The survey didn’t really provide a clear single definition of sustainable investment, which will be uniform across the real estate industry. That still isn’t there. This means investors who are knowledgeable about this area will start to scrutinise the robustness of a manager’s definition of sustainable investment. The INREV DDQ has dedicated ESG sections requiring certain information about sustainable investments, and these will become even more important.

JT: I don’t think there’s going to be a single definition of what constitutes a sustainable investment, because the range of products an investor would be investing in is so vast. I think the appropriate approach is that there’s a minimum threshold that has some constraint, and that managers are measured on what is additional to that threshold.

What investors need to know is that if they’re putting their capital into a sustainable investment there’s a minimum level that’s consistent across their portfolio in real estate. They need to know that there are specifics to the fund that a manager is going to report on, on an annual basis, and that they’re going to prove that to be the case.

What should the next steps on the issue be?

AD: I think you need flexibility around the contribution to a social or environmental objective. I’m not sure you want that level of flexibility around the ‘do no significant harm’ assessment – this has to be the regulator’s job. Given that it is opaque, investors will have to specify what they want.

I feel that SFDR Article 9.3 is a bit of a red herring. What would be very helpful is a specific category for transition. Potentially with the consultation on the SFDR and the suggestion that labels might be adopted instead, could there be a transition label?

JT: Working with the INREV team to help get some visibility of perspectives across the industry feels like a really useful achievement. It’s certainly something that ought to be built on over time.

I see a regulatory push and a political push as necessary. If you’ve got the right regulatory wind, not only does it generate the opportunity for the products, the investment flows in the capital, the jobs and everything that goes with it, but it does so in a way that delivers with a much, much greater degree of transparency and credibility. Because now, with every report that you give to an investor, you also have to give an audit.

View the 2023 Sustainable Investment Survey infographic for more detailed insights.