Asset Management Will Deliver On ESG+R Commitments

The wave of demand for ESG+R continues to wash over the commercial real estate investment industry.

As investors, occupants, and regulators increasingly require that real estate investment decisions are evaluated through an ESG+R (Environmental, Social, Governance + Resilience) lens, the investment management community is rising to the occasion with commitments to deliver strong risk-adjusted returns and positive social impact.

These commitments are communicated to stakeholders through the publication of ESG+R reports. As reported by NAREIT, 100 of the 100 largest public equity REITs totalling $1.4T are now reporting their ESG efforts publicly with 80 of them publishing sustainability reports in 2021.[1]

Across the real estate investment industry, stand-alone ESG+R-focused teams comprised of internal and external professionals evaluated the risks and opportunities, set data-driven targets, built strategic roadmaps, and published sustainability reports. Through updating policies and procedures, obtaining certifications, strengthening governance controls, and outlining ESG+R commitments, these teams mined the paperwork points of the ESG+R scorecards.

Move to Execution

With commitments laid out for stakeholders, real estate investment firms must now execute the plan to integrate ESG+R across their business and portfolios. Operationalizing ESG+R across the organization and investments requires the involvement of all the business departments with clear and consistent communication of goals with assigned roles and responsibilities.

At the portfolio level, the asset management teams craft and execute the business plans for the real estate assets. They build and lead the cross-functional teams that create and optimize value across the properties by executing the leasing strategy and decisions, overseeing operations, and allocating capital across the portfolio. They are the gatekeepers, teambuilders, and decision makers with deep knowledge of the buildings.

The decisions made by the asset management teams are how organizations will achieve their ESG+R investment targets.

Outcomes Matter

Investment managers will be held accountable for their ESG+R commitments based on outcomes. Stakeholders will measure the results and track performance along the way as real estate firms undertake sustainability-linked loan and green bond obligations, meet supplier diversity targets, and achieve long-term, decarbonization goals.

ESG+R reporting tools are reinforcing the measurement of results. GRESB is the global capital markets ESG benchmark that covers $5.7T in real estate assets under management across almost 117,000 assets. In 2020, GRESB moved to mandatory asset-level reporting to facilitate the transition “from the current emphasis on management and transparency to greater emphasis on performance.”[2]

Given their extensive knowledge of the building and the market, the asset management teams are best positioned to deliver investment results at the asset level.

Now is the Time

Sitting firmly in fourth quarter of 2022 with rising interest rates in an inflationary market, real estate investment firms are facing falling asset valuations and an uncertain capital markets outlook. Within portfolios, valuations continue to diverge across the asset classes with multifamily and industrial assets seeing positive to stable valuations due to continued rent growth as an offset to increasing capitalization rates.

With the completion of the asset level 2023 budgets and business plans, the asset management teams are building the strategic plans for the portfolios. These plans include capital allocations, investment hold timeframes, and forward-looking projections to optimize the portfolio performance.  

Given that the portfolio’s performance will be measured by how it is tracking to meet ESG+R commitments in the near and long term, aligning ESG+R mandates with the asset level 2023 budgeting and business planning process is essential.   

Build the Capacity

As the market forces impacting real estate investments continue to intensify, high-performing asset management teams provide the competitive advantage. The asset management professionals with successful track records during both up and down markets have proven adept at navigating difficult terrain while leading multi-disciplinary teams to achieve a common goal.

Investment management firms can hone that competitive edge by building the ESG+R capacity within their asset management teams through education, outsourced expertise, and technology solutions. Pairing this additional capacity with a clear line of sight to the common goal enables the asset management team to make budgeting, leasing, and capital allocation decisions that deliver on portfolio level ESG+R commitments.

Reap the Rewards

As the market and asset experts, the asset management teams are best positioned to identify the opportunities to exploit dislocations in the marketplace. With the benefit of an ESG+R framework, asset management teams will deliver Alpha[3] returns, create value, and meet ESG+R goals.

The investment management firms leading the ESG+R adoption curve have built a strong foundation for integrating ESG+R principles across the organization and portfolios. By equipping their asset management teams with ESG+R expertise and resources, these organizations will execute on those commitments and deliver better human and investment outcomes.