By Dan Grandage, Head of Responsible Property Investment
What do you think of when you hear the words sustainability or being green? Does it conjure images of long-haired hippy-types wearing brown sandals and hugging trees? Saving polar bears? Or recycling bottles?
Environmental issues are often misunderstood and seen as someone else's problem. Worse, they may even be ignored and considered to be irrelevant to modern business.
The reality couldn't be further from the truth: consideration of environmental, social and governance (NASDAQ:ESG) issues is now a key part of modern property management and makes good business sense.
ESG in action
But what do we mean by environmental, social and governance when it comes to property investing? In essence, it is recognizing that investment activities can have a direct and indirect impact on the environment and on society. This can present risks as well as opportunities for improvement.
In practice, this involves a wide range of activities, such as improving energy efficiency and water usage, dealing with ground contamination issues or flood control, and even facilitating transport links and electric vehicle facilities. The building fabric and the welfare of those who occupy buildings, for example, are other important considerations. As a tangible asset, property is at a greater risk from changing environments and rising costs than other asset classes.
But as well as being good for the environment, a rigorous ESG approach also makes properties more modern and efficient - which makes them more attractive to tenants. As a result, an effective ESG strategy can reduce portfolio risks, secure higher rental growth from our properties and reduce voids within our property portfolios. It can be a beneficial situation for both investors and tenants, and for the environment.
Sunlight doesn't just make vitamin D
An example of a successful ESG policy in practice is a large solar panel development project recently completed on a UK property. The 16,720 square meter industrial property in Edmonton, north-east London, is occupied by Biffa Waste Services. It is the company's key waste recycling plant in London, and its lease has a further 20 years left to run.
The project involved installing 1,000 solar panels, with the aim of providing around 225,000 kilowatt hours of electricity each year and reducing carbon dioxide emissions by around 120 tons a year - the equivalent of heating water for 11.2 million cups of tea every year. This project is also expected to create £280,000 (about $362,000) of savings for the tenant over the next two decades.
The benefits of having an effective sustainable policy for properties and the environment can be numerous. This may not be a "nice-to-have" policy. Rather, it can be a critical element of day-to-day asset management. It could be a vital component for keeping properties modern, efficient, profitable and attractive to tenants.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Companies mentioned for illustrative purposes only and should not be taken as a recommendation to buy or sell any security. It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities in this list.
Investments in property may carry additional risk of loss due to the nature and volatility of the underlying investments. Real estate investments are relatively illiquid and the ability to vary investments in response to changes in economic and other conditions is limited. Property values can be affected by a number of factors including, inter alia, economic climate, property market conditions, interest rates, and regulation.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks may be enhanced in emerging markets countries.