The built environment accounts for 41% of all global energy usage, 40% of natural resource usage and 38% of all CO2 emissions
Social returns and impact investing are two relatively new themes that have emerged in the global investment community, though much of the debate to date has been taking place outside the real estate asset class. Despite this, we expect that an increasing desire to ‘do good’ will motivate many private and institutional investor strategies in the future, and actually property as an asset class arguably offers a lot of opportunities to invest for good.
While the two terms come at the topic from slightly different angles, they have both evolved from the well-established desire to invest either for or taking account of Environmental, Social and Governance (ESG) factors. Other commonly used terms that broadly cover the space include sustainable investing, socially-responsible investing, or mission-related investing.
Despite starting in the 1960s, ESG investing has boomed in recent years due to the rise in sustainability (environmental and otherwise) challenges facing the world. This has heightened investors’ awareness of how their client’s motivations might change away from just demanding a pure total return towards a blend of total and social return. A 2016 research paper from Bank of America suggested that over the next two to three decades the millennial generation could put $15–$20 trillion into US-domiciled ESG investments, which would roughly double the size of the US equity market. Indeed, since its founding in 2006, the United Nations Principles for Responsible Investing (PIRI) has attracted support from nearly 2,000 signatories representing over $68 trillion of assets under management.
Much of the real estate focused activity to date has been in the residential space, as improving or delivering new social housing delivers an immediate social goodSavills Research
Unsurprisingly ESG investors have been asking a lot of questions of the built environment, since buildings account for 41% of all energy usage, 40% of natural resource usage and 38% of all CO2 emissions.
However, in the early days much of the swing towards energy labelling of buildings and the wider environmental sustainability debate was hampered by asking the wrong questions. For example, the key question should not be ‘will someone pay more for this sustainable building?’ but ‘is it cheaper to operate because it is sustainable?’.
The concept of Impact Investing naturally followed on from the rise of ESG investing and in essence it asks whether an investment makes a positive impact beyond the economic return. This might be in terms of a net environmental benefit or a social one. While the spotlight of Impact Investing has primarily been focused on bond issues to date, we see no reason why real estate should not play a very real part in this debate. Indeed, real estate may even be one the best ways of Impact Investing.
The size of the prize is huge, with the most recent Global Impact Investing Network Annual Survey estimating that the market doubled from $114bn in 2017 to $228bn in 2018.
There are already impact funds focusing on both residential and commercial property, and their focus varies from having a positive environmental affect to having a positive social effect. Much of the real estate focused activity to date has been in the residential space, as improving or delivering new social housing delivers an immediate social good. However, more recently there is an increasing recognition that commercial property can deliver a social good through enhancing health & wellbeing, or education & skills. Many large UK commercial property investors and owners are members of the Better Building Partnership which started to improve the sustainability of the existing commercial stock, but is increasingly looking beyond just environmental issues. For example, an enhanced social return can be delivered by such simple things as job creation and apprentice schemes during the construction phase of a project, or by the sharing of the eventual facilities with community groups.
The primary objective of impact investing is to make both a positive social and environmental impact through investment behaviour and decisions
Implications for higher education
Implications for higher education We believe that education providers and owners of educational property are already delivering a significant social return. However, there may be an opportunity to marry up this behaviour with investors who are looking for solutions to their desire to be more impactful.
Universities were impact investors long before the term was even coined. This is because improving people’s education is arguably the greatest social good. However, there are to date relatively few examples where a higher education provider has teamed up with an investor with the specific aim of delivering social returns.
Given the ever increasing pot of money targeted at Impact Investing, the challenge will be finding destinations for that money. An asset where a university is curating a porous educational offer that enhances the local community should tick many of the boxes that increasingly socially aware investors are looking for.
Furthermore, Impact Investing will require that the real estate industry thinks more about the long-term impacts of investments. This is generally something that real estate owners have been fairly bad at, but an area in which universities and their endowment funds have excelled. Thus, not only might universities be able to deliver the assets that deliver impactful investments but also the long view that escapes some institutional investors in real estate.
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