With sustainability and climate resilience climbing ever higher on the real estate investor’s agenda, IQ magazine was delighted to have the chance to speak to the chair of INREV’s ESG Committee, Abigail Dean. Sustainability is also the main focus of her day job as Global Head of Strategic Insight at Nuveen Real Estate, which also has the over-arching aim of future-proofing the business’s strategy in the light of global megatrends.
‘The most important aspect of my role at Nuveen is helping to achieve the challenging goal of reaching Net Zero Carbon by 2040, which is part of our wider aim to limit the impact of sustainability risks on investment value,’ she explains. ‘Initially, this means planning for the transition and understanding the likely costs and effects on investment returns. We already have a number of buildings that we are developing or refurbishing to be operationally net zero and are starting to factor this into the underwriting process for acquisitions, but the biggest hurdle will be upgrading existing stock. Nuveen is amongst those at the forefront of the industry in targeting 2040 as the date for making its global portfolio net zero carbon.’
Looking more widely, Abigail notes that the European non-listed sector is starting to see some smaller portfolios with strong carbon credentials, but the move toward transitioning current stock to Net Zero standards remains a long way off. ‘This will need a change in mindset among investment committees and a big upskilling across the industry, from architects through to facilities managers,’ she suggests. ‘INREV has an important role to play here, particularly in setting standards via its guidelines. This isn’t just a question of reporting but also of how sustainability can be integrated into the whole investment process. The latest version of the sustainability module we are drafting is key here, but so is the way that sustainability now features in many of the other modules as well – for instance in governance and in the future in property valuation, which is currently being reviewed. ESG is also now prominent in the Due Diligence Questionnaire, which has a strong influence over the investment process.’
The move toward transitioning current stock to Net Zero standards remains a long way off. This will need a change in mindset among investment committees and a big upskilling across the industry, from architects through to facilities managers
‘INREV also has a crucial role to play in spreading information on sustainability, such as through its training courses and insight publications,’ she continues. ‘This could be even more important for smaller investors and managers than those with the scale of Nuveen, as they may not be able to devote the resources needed to work out best practice for themselves. INREV is always good at demystifying areas of uncertainty and bringing the strongest minds in the industry together to debate ideas and reach practical conclusions, in this case not just LPs and GPs but also advisors such as lawyers and valuers.’
INREV is always good at demystifying areas of uncertainty and bringing the strongest minds in the industry together to debate ideas and reach practical conclusions
‘Indeed, reflecting sustainability issues in valuation is a critical question that the industry has yet to resolve,’ proposes Abigail. ‘In many cases the carbon footprint of a building isn’t yet seen as relevant to its current price in the market, and therefore the capex needed to make it carbon-zero compliant at some point in the future isn’t accounted for. Personally, I think the most important thing now is transparency – making it clear what risks are and aren’t reflected in valuations, and I know INREV very much endorses this approach. One possibility that has been advanced could be including both a current market value and a ‘sustainable’ value to support it. Some might find this controversial, but INREV is definitely the right forum to discuss ideas like this.’
Personally, I think the most important thing now is transparency – making it clear what risks are and aren’t reflected in valuations, and I know INREV very much endorses this approach.
Regulation on financial disclosure is another important aspect of sustainability for investors, with SFDR clearly set to be a major consideration in terms of how vehicles are described and marketed. ‘INREV is currently in the process of working out exactly what the regulations mean and spreading this understanding to the industry,’ Abigail explains. ‘Most funds will probably seek to comply with Article 8 of SFDR, as this provides for a level of disclosure with which most should be able to comply. Article 9 is much more challenging for real estate, as it requires all investments held to be ‘sustainable’, and therefore would not cover those vehicles seeking to make the transition to Net Zero by improving the buildings it holds – which is where most of the real effort will be needed if real estate is to achieve Net Zero. This is an area where the regulation may have some unintended consequences as it does not currently ‘reward’ and incentivise those vehicles investing in the transition.
Regulation on financial disclosure is another important aspect of sustainability for investors, with SFDR clearly set to be a major consideration in terms of how vehicles are described and marketed
If Abigail’s focus is primarily on the climate related aspects of ESG, the ‘S’ and ‘G’ elements are clearly also important, both for her work at Nuveen and also at INREV. ‘The social role of real estate investment is increasingly recognised across the industry, particularly with the growing consciousness of social inequality in Europe and globally,’ she notes. ‘Affordable housing is the most obvious area where investors can make a difference, but the scope is widening to encompass regeneration more generally. INREV has started to produce papers explaining the disciplines involved in impact investing, which often addresses social issues, while it has also started integrating social aspects into the sustainability guidelines. And as far as the “G” is concerned, well, that ultimately underpins everything – but for INREV I would say transparency is the most important thing.’