Hermes Investment Management, the £29.8 billion manager focused on delivering superior, sustainable, risk adjusted returns to its clients – responsibly, has today published the third paper off the back of its annual Responsible Capitalism survey.
Responsible Capitalism and Sustainability reveals that of 109 UK and European institutional investors surveyed, 48% of respondents believe ESG factors are not important when assessing direct property investments. Only 19% consider them vitally important.
According to Chris Taylor, Head of Private Markets at Hermes Investment Management, the report shows many institutional investors are failing to recognise the importance of renewable energy and control emissions, or support both sustainable communities and social enterprises.
“Given all the information available to these investors, the results here are astounding. Even in an area where there is a regulatory imperative, such as energy efficiency, the response is alarmingly dismissive. Nearly half the investors believe energy efficiency is, by and large, unimportant, and yet it is easy to demonstrate financial savings from best practice here and reckless to ignore the red tape.
“For example, I would argue the introduction of energy performance certificates is simply another aspect of managing risk. Those investors that have decided not to anticipate regulatory change will get caught out,” he said.
Culture of short-termism: a problem for pension funds
These survey results suggest such investors are short-sighted or unduly influenced by short-termism, possibly both, which Mr. Taylor says is problematic for pension funds. And more than any other asset class, real estate warrants – and rewards – a long-term approach to investment.
“Long-term and responsible investors are very good partners for the public sector. By contrast, a private equity house – or any investor rewarded for short-term gains – is unlikely to be a particularly good partner for the public sector,” he says.
It is surprising, says Taylor that only 37% of institutional investors surveyed felt pension funds should give greater consideration to whether their investments will improve or detract from the overall quality of life experienced by beneficiaries when they retire.
“Sustainable investment is about far more than managing energy consumption or water wastage, important though they are. When we think long-term, we must consider the so-called mega trends affecting society: everything that relates to globalisation, urbanisation and technology. The glue that binds these three themes together is demographic change: lifestyle changes, how people live and how people decide to work and spend their money,” said Taylor.
King’s Cross – a living case study in sustainability
Mr. Taylor says the impact of these trends can be seen at King’s Cross, where Hermes – through its association with the developer, Argent – is part of the team transforming the former industrial blackspot into a new mixed-use district. According to Hermes, this is a 20-year project and there are at least five years to go before construction is complete and it becomes the setting for 45,000 people living, working and studying. By then there will be 2,000 new homes, 300 social housing units and two primary schools interspersed with 20 new streets and 10 public squares.
Taylor says that Hermes has a fiduciary duty to its 300,000 pensioners. Its job is to anticipate what occupiers want from real estate because they pay the rent – and that’s investing in real estate he says, but it’s not just about floorspace.
Taylor continues: “The way to future-proof buildings – for the benefit of our investors – is to make sure they are in a sustainable, socially inclusive environment. It’s not the building that’s important but the amenity value of its location in terms of infrastructure and public realm. You need only look at the great estates of London to understand that they have endured because the integrity of the estate has been maintained, as much as the buildings.”
Leap of faith
Taylor says institutional investors need to understand that responsible investment requires a ‘leap of faith’.
“Responsible investment requires a leap of faith on the part of institutional investors. They need to anticipate change. A big hurdle here lies in the fact that the conventional fund manager’s approach to investment involves looking back on past performance, based on benchmarking by Investment Property Databank of the individual sectors of offices, retail and industrial. Long-term, mixed-use investment does not fit easily into any of those indices.
“But if we are to think about the future, rather than benchmark against the past, then as an industry we need to change our approach to investment. We need to find a different measure or set of measures – benchmarking not necessarily by sector but perhaps by asset. Over 60% of institutional investors we surveyed want their fund managers to be more transparent and share their ESG analysis on at least a quarterly basis. So the demand from clients is there: as an industry we need to meet this,” Taylor concludes.
Read the paper: Responsible Capitalism and Sustainability