In investing parlance, sustainability isn’t just a catch-all phrase for the numbers that don’t carry dollar signs. It refers to substantial elements of the ability of a business to perform over the longer term. For real estate, predicated as it is on ongoing rental yields and the relationships between landlords and tenants, our view is that sustainability factors almost always have considerable impact on performance over shorter time frames as well. This kind of quality outperforms over the entire life of the real estate cycle, and assessing it is the first step in our bottom-up investment process, allowing us to understand the firm’s long-term trajectory and delivery on its business fundamentals.

A number of factors go into scoring each of the components that make up a company’s ESG (environmental, social and governance) assessments. Many of these are unique to real estate, or have a relevance in the sector that may not be present elsewhere. Here are a few attributes that we particularly look for when considering whether investment in a company stacks up from a sustainability angle.

1. They prioritise energy-efficient buildings

From an environmental point of view, our principal consideration is maximising the number of energy-efficient buildings in any given real estate portfolio. This has advantages for all concerned. It often reduces costs for the tenant, in terms of outgoings for water and energy; it may also increase returns for the owner, whose property can access a larger pool of tenants, who have a higher propensity to pay a premium for greener space and lower outgoings. Of course, the planet comes out ahead as well. Overall, this focus means that the carbon footprint of our investments is considerably lower than comparable benchmarks in the sector.

Other important environmental considerations include water efficiency and the carbon footprint of new developments.

2. They have a strong track record in safety

From a social aspect, safety is a critical indicator of the ongoing ability of a real estate business to carry out its future plans and meet its objectives. We go to great lengths to understand the track record of a company’s on-site construction from an occupational health and safety perspective, with the potential for adverse regulatory and industrial intervention in mind.

Other important social considerations include ethics in corporate supply chains.

3. They have an assertive, independent board

In terms of governance, we approach the issue from a minority shareholder’s perspective, so we watch board structures and the independence of directors with laser-like focus. In our experience, stronger boards and more effective governance equates to substantially better outcomes for shareholders like us.

Another important governance consideration is gender diversity. Too often there is a tendency to shelve this as purely a social issue, and to a large extent it is. More importantly, however, in this context the evidence shows that gender diversity on boards and in management teams has a positive effect on company performance.¹

Our listed real estate team loves what it does. On a day-to-day basis we engage with some of the brightest and most entrepreneurial global minds, and we find that almost universally they are in accord with the importance we place on ESG in our assessment of long-term value potential. For my part, I find it extremely comforting that the people charged with allocating capital in our world are aligned on these issues, and I am certain that the cumulative effect will be enormous over the coming years.

¹ Example: https://www.mckinsey.com/business-functions/organization/our-insights/delivering-through-diversity