The most important question we should be asking about ESG

In the UK, 80% of buildings that will exist in 2050 have already been built. Therefore, the transition to net zero requires a fundamental transformation of the built environment, as well as substantial investment in both retrofitting existing assets and capital spend on social infrastructure. There is universal agreement as to “why”, but it is evident we have work to do on the “how”.

Achieving net zero across the sector warrants a shift in current investment and asset management practices. It’s therefore important we find the right commercial models to implement cost-effective methods of retrofitting to net zero standards. This means being innovative and flexible in our approach and utilising technological solutions to help us better measure and reduce emissions – at both asset and fund level.

As part of our net zero commitment, we continue to focus on ESG integration and implementation across the property life cycle. As an example, we have embedded operational and embodied net-zero carbon requirements for all new developments and major refurbishments, as can be seen at North Quay House, Bristol, which is on track to achieve embodied emissions of around 30% below the Royal Institute of British Architects’ 2030 new-build net zero targets.

Long-term gain

The users of real estate will increasingly select their spaces based on environmental and social outcomes. Those who position their portfolios towards the highest net zero standards will see the benefits – to occupier demand, valuation and investment performance, as well as risk reduction.

To ensure resilient long-term investment returns from our property portfolios, we must recognise the need to employ robust ESG risk management processes. Mandatory disclosure of climate-related risks and opportunities will come into force in the UK in April 2022. An assessment of historical flood risk is already included in our standard due diligence process of all real asset property acquisitions. And, as part of developing a climate resilience strategy that supports our net zero roadmap, we have been working to enhance our approach to forward-looking climate physical risk.  

Our analysis, looking ahead to 2030, 2050 and 2100, indicates that the biggest current and future threat to our UK-based portfolio is flood risk. By taking an enhanced approach, we can also improve the granularity of the assessment and the locational accuracy, ensuring larger multi-building sites are captured more accurately and at a comparable granularity to single-site locations. 

Facing up to the challenge

But it’s not solely down to us. Occupiers procure their own energy and control all site operations across almost 50% of our portfolios; they play a central role in how efficiently buildings are used and energy is consumed.

This is one of the biggest challenges. The real estate sector is increasingly realising the need for greater collaboration and alignment between owner and occupier, not least when considering emissions controlled by occupiers.

So how do we strengthen and scale occupier engagement? LGIM Real Assets has incorporated green clauses in its leases since 2011, which we have continued to strengthen. Now, within the Sustainability DC Property Fund launched in 2021, we screen all new tenants on ESG grounds to identify occupiers undertaking activities that may have a material ESG risk. This has enabled us to push new ground as a template for the rest of the portfolio.

Our new dedicated occupier engagement platform, Vizta, will also support the gathering of occupier ESG data. It enables stronger relationships with occupiers, allowing LGIMRA to educate and drive action.

Don’t forget the “S”

Those who do not engage proactively on social impact risk being left behind.

The investment community’s increasing focus on environmental objectives is non-negotiable, given the shattering impacts of climate change. However, what remains essential but is often forgotten is the need for a fair and equitable transition. Social and environmental objectives must be understood to be intrinsically linked. Therefore, real estate owners and investors have a unique opportunity to play a tangible role in delivering on the “S” of ESG.

A solution to this is taking a place-based impact approach, fully aligned with the commercial aims of the business. In most cases, there is an immediate alignment between commercial interests of longer-term owners and contributing to improving economic, societal and environmental outcomes for the local community. Driving holistic ESG impact, not at the expense of returns but to enhance it for the long term.

To deliver true impact when prioritising ESG and building back greener, the real estate sector must commit to radical collaboration – this will form the foundations of an inclusive, sustainable recovery.

Shuen Chan is head of ESG at LGIM Real Assets

As appeared in EG on 18 February