Industry leaders’ take on ESG in real estate investment management
ESG (Environmental, Social and Governance) is arguably one of the key topics in the real estate industry, driven by growing public interest in sustainability and new regulatory requirements. Real Estate Investment Managers (REIMs) are strongly affected by these trends and face various challenges, since ESG requires a broad change of perspective in many business areas. Therefore, as part of this publication series, Deloitte examines the real importance attached to ESG for the sector, the approaches REIMs are taking, where there is room for improvement, and what can be expected from the industry in the future.
The content of this series was collected and analyzed between August and October 2021. In a total of 16 hypothesis-driven interviews, 22 managing directors and department heads of leading European and global REIMs based in Germany were surveyed. Thus, the participants represent approximately € 600 billion in real estate assets under management. The aim of the interviews was to obtain a meaningful picture of the industry on the topic of ESG in order to highlight not only challenges and risks, but also potential solutions and opportunities. The interviews were conducted based on seven hypotheses that participants had to ultimately agree or disagree with in the otherwise free-form conversations. Deloitte will publish a Point of View for each of the following hypotheses at regular intervals as a summary of the interview results for each hypothesis.
Discussion of Hypothesis #1: „ESG is a marketing tool. The industry puts its image and regulatory compliance ahead of delivering real impact.”
Real estate investment managers are caught between regulatory compliance, changes in investor demand and a change in society as a whole in favor of a more sustainable future, which is also carried into the company by its employees. At the same time, ESG represents an important opportunity for differentiation and can be used as a marketing tool to stand out from the competition.
Discussion of Hypothesis #2: „The sum of individual efforts by REIMs is not enough to achieve the ambitious climate targets of the EU Green Deal. Competitive thinking and a lack of trust confront the industry with obstacles when it comes to collaboration among competitors.”
The entire real estate investment management industry needs to pick up speed now. Companies are striving to make an impact beyond mere regulatory compliance. Industry associations are seen as a helpful tool to foster collaboration within the industry. However, the majority remains convinced that competition is necessary to strengthen innovation and gain a strategic advantage.
Discussion of Hypothesis #3: „REIMs cannot implement a "managage to green strategy" on their own. Collaboration with tenants and service providers is essential for this. However, concrete initiatives are still missing."
Vertical collaboration is commonly seen as essential in achieving the EU climate goals. However, an industry-wide collaboration standard between owners, service providers and tenants does not exist. In the context of the lack of a legal framework for data collection, it is even more important that REIMs continue to take the initiative and establish a new tenant proximity in order to reconcile the sustainability agendas of all stakeholders.
Discussion of Hypothesis #4: „The most sustainable building is the one that is not built.”
The path to a decarbonized real estate industry cannot be taken by new construction alone. At the same time, not all existing buildings can be refurbished in a meaningful way. Therefore, the life cycle of existing buildings must be extended through refurbishment wherever possible. On the way to a circular (building) economy, further innovation is also needed in new construction so that the amount of CO2 released by demolition/new construction is limited.
Discussion of Hypothesis #5: „The costs of constructing, refurbishing and operating sustainable buildings will exceed the economic benefits. Sustainable investors will therefore have to forego returns in the future."
It seems clear that the transfer of real estate to a sustainable climate path is associated with increased investment costs. However, the focus of investment managers is less on the short-term investment needs in the form of CAPEX measures but more on their influence on the long-term value of the properties through portfolio maintenance and risk minimization, in line with an economic concept of sustainability.
Discussion of Hypothesis #6: “ The integration of ESG along the entire value chain is costly and comes at the expense of profits from management fees. However, the scope for adjustment is moderate. Efficiency pressure on existing business is increasing.”
As the previous theses have already shown, the decarbonization of the real estate industry is accompanied by higher expenses along the entire value chain. Investment managers are increasingly focusing on the long-term value of properties in order to remain competitive in the future. This is not always to the account of profits from management fees, but can also be a value-creating differentiator for the industry.
Discussion of Hypothesis #7: An ESG scoring/rating is only as good as its underlying data. The incomplete data basis and the need for extrapolation pose major challenges for REIMs.”
There is overwhelming agreement that ESG scorings are only as good and meaningful as the data on which they are based. Rather, the problem facing real estate investment managers (REIMs) is data availability, provision and quality. Perhaps, there has been too much discussion about the need for common standards, scorings and reporting in the past, and too little about how to enable REIMs to fill data and quality gaps.
The following Point of Views will summarize our interview findings in 7 hypotheses:
We are pleased to share our interview results with you and look forward to your perspectives and comments with great interest.