The rise in alternative investing combined with an increased focus on integrating environmental, social and governance considerations into the investment process is leading pension plans to a natural question: how can they integrate ESG in real estate portfolios?
The buildings sector has one of the highest carbon footprints, said Derek Warren, vice-president and portfolio manager at Lincluden Investment Management, during a session at the Canadian Investment Review’s Defined Benefit Investment Forum in Toronto on Dec. 6.
“If you think about it, that’s actually pretty logical because real estate is everywhere. How much of Toronto is covered in buildings? So clearly all of those are using energy.”
Subsequently, real estate is a big target when it comes to ESG, which is a good thing because small changes can have big impacts, he said. “We can actually really move the needle here to reduce carbon emissions and other aspects of the ESG.”
But how can a plan sponsor make sense of the E, S and G when it comes to its real estate portfolios?
Plan sponsors that want to make changes can simply start collecting data, Warren said. “Don’t worry so much about trying to save the world. Focus on gathering some data points from your managers or from your properties. Start. That’s all you have to do is start. And once you have a base year, you say, ‘I used this much energy in that building.’ Well then, what is it next year? And what is it next year? Because if you can’t measure it, you won’t manage it.”
Once pension plans have a base year, they can move on and see if they’re moving the needle. “I like the expression, focus on value not values.”
For the E, for example, plan sponsors can look at the location of buildings where tenants can walk into work instead of driving. “This can be measured,” Warren said. “You can have consultants get your walk score and your transit score. So these are scores that can be written down and measured and now you have data points that show the walkability of your properties.”
Plan sponsors can also measure energy savings and carbon consumption and intensity, he added.
However, measuring social aspects can be a little bit harder, though it is possible. “If you own a retail project or an office building, you can count how many lost time injury days there are of the staff or tenants, lost workdays. You can count how many accidents. Clearly, this is something you want to be able to start counting and then measure that going forward.”
On the G side, plan sponsors can measure diversity, said Warren. “We can count the diversity of tenants, customers and our staff.”
Overall, ESG is here to stay, he noted. “You want to focus on that data, you can’t manage what isn’t being measured. So establish a base year if you don’t have one and start to monitor the improvement in the portfolio.”