There are obvious social upsides to thinking green when it comes to making investment decisions, but is it worth the cost when buying real estate?
For OPTrust, the Ontario public sector pension fund has seen a strong business case for embracing sustainability since it started investing directly in real estate in 2005.
“We recognize . . . that responsible investing and [environmental, social and governance] factors really can affect investment risk and return,” says Robert Douglas, managing director of real estate investments at OPTrust. “The reason it’s important is that we’re long-term investors. . . . We need to look over our head at challenges and opportunities that could impact those investments.”
Read: Don’t take ESG requirement as an endorsement to invest with a moral compass
According to Douglas, OPTrust considers environmental issues from the beginning, whether it’s planning the construction of a new building or the redevelopment of an old one. “We look at [buildings] from a life-cycle perspective, so more recently we’ve become active with the development of new properties,” he says.
That includes coming up with plans to make buildings operate more efficiently and aiming for environmental certifications, such as Leadership in Energy and Environmental Design (LEED), for new buildings, says Douglas.
While property owners seeking certifications must meet rigorous standards, they definitely see value in attaining the credentials, says Michael Kirby, managing director and head of U.S. asset management at Invesco Ltd.
“It’s become a market-driven phenomenon,” he says. “The fact is that LEED and other green certifications have become somewhat of a proxy for quality, well-run buildings. From a pragmatic standpoint, even if we weren’t focused on sustainability, the fact that these buildings can achieve these designations tells you something about the underlying real estate.”
Read: Sovereign pension plans investing heavily in real estate: study
Apart from meeting certification standards, Douglas says OPTrust conducts energy audits of existing buildings by studying energy consumption and ways to make systems more efficient.
The shift in market sentiment on environmental, social and governance factors over the last 10 years has translated into more earnest commitments from institutional investors to sustainable investing, says Philip Gillin, an executive vice-president and portfolio manager at Sun Life Investment Management and Bentall Kennedy.
Gillin points to a 2015 Bentall Kennedy study that analyzed 10 years of data from properties in Canada and the United States. The study found investments in green-certified office buildings deliver higher income and value to their landlords.
Institutional investors such as OPTrust say they’re well aware of the benefits of green office buildings.
“What we’re finding is that the largest and most sophisticated tenants in the marketplace are demanding these certifications and green building systems as part of the use of their space,” says Douglas. “It’s important to the way they operate their business and culture. So it’s becoming standard practice in the industry at this stage.”
Read: The evolution of asset allocation: Using alternatives to overcome challenges
Indeed, the study suggested that besides drawing tenants, sustainable buildings can produce higher renewal rates and rents, says Gillin. “From a landlord’s point of view, this is where the rubber really hits the road. These facts, I think, were very reflective of the value in dollars and cents of sustainable real estate.”
And while green buildings often come with additional costs, Kirby says investors can recoup that premium from higher rents and occupancy rates over time.
For long-term investors like pension funds, the modest premiums are justifiable, says Douglas. “I would describe them as incremental costs. . . . You have to look at the life of that improvement of your investment over a long period of time.”
Jann Lee is an associate editor at Benefits Canada.
Get a PDF of this article.