The ESG data files, part seven, continued: Real estate - Social and governance data

Channels: ESG, ESG Data

Companies: MSCI, Hermes, Actiam, Verisk Maplecroft, GRESB, RICS

People: Vincent Nobel, Gillian Mollod, James Lockhart Smith, Rik Recourt, Will Robson, Arjan Ruijs, Kees Ouboter

The market for data on the social impacts of investments in real estate is growing rapidly, writes Christopher Marchant

The first part of this feature on ESG data for real estate can be read here.

Greater awareness of environmental, social and governance (ESG) factors among investors has led to a hunger for greater understanding of social considerations in real estate, especially when considering the quality of life provided to tenants and building occupiers.

Social considerations in real estate have evolved from being about the safety of the asset for its users, and now also include the health and wellness of its residents.

Investors are increasingly realising that their capital gives them an active stake in occupants' residency conditions.

Vincent Nobel, head of asset-based lending at Hermes, details some of the motivation behind the Hermes report: "If you are financing immovable real assets in real estate, the location will always provide you with certain challenges and risks. Considerations such as asbestos in walls have been part of real estate investing for the last 50 years.

Vincent Nobel

"Yet, recently, there have been ways in which this assessment is becoming much more sophisticated. As a lender, I would say that as recently as five years ago we would have argued that while we lend on properties we don't actually own them so what can be done to make planning and implementation better.

"That mindset has changed to now realising that, as a lender, we are a key stakeholder in the asset, therefore our opinions do matter regarding how the asset is run."

As well as recommending mixed-use housing developments that have the potential to "create dynamic, vibrant spaces that allow people of all backgrounds", the Hermes report argues the need to use its position to invest in a new generation of modular-housing units that are more sustainable and can deliver a roughly 30% increase in energy efficiency.

"The mind-set has changed to now realising that as a lender we are a key stakeholder in the asset, therefore our opinions do matter regarding how the asset is run" – Vincent Nobel, Hermes

The modular supply chain is controlled from when the materials are sourced at the start of the project, all the way to practical completion.

Nobel says: "We've all seen with the Grenfell Tower fire [in the UK in 2017] and more recently the student block fire in Bolton [also in the UK, in November 2019], that what materials are used in an asset can have a big impact on how an asset is used or what that risk is to an asset.

"These sort of things that we look at are a lot more to do with the physical inspection of the asset and judgement on what you find in that inspection, rather than using big data in publicly available databases."

As well as physical risk and climate change, real estate data has to respond to the increasing interest of fund managers in social and governance considerations.

James Lockhart Smith, head of financial sector risk at Verisk Maplecroft says: "Of great importance is data points around corruption because of the extent to which real estate could be implicated in certain sorts of financial crime.

"An ironic discovery here is how little geography comes into this, and funds should have appropriately robust safeguards in all instances, whether or not they're in countries where political corruption is a significant concern."

Rik Recourt

Hermes' Nobel adds: "On the most basic level, we look at any asset and ask if it is fit for purpose; that means both does it meet certain standards, and also does it meet the demand for that space in the area."

He cites an example wrought from the Hermes data, suggesting that in some instances multiple shopping centres being built close to each other will lead to an oversupply and the risk of investing in an asset that is essentially redundant and arguably harmful to the local area.

Rik Recourt, associate for real estate at GRESB, says: "GRESB sees tenant satisfaction as very important, as well as employee satisfaction, employee engagement, and next to that community engagement.

"There is less focus on governance itself, partly because we look at both listed and private real estate, and both sectors within real estate require a different governance analysis.

"The core of our ESG analysis focusses on environmental data, which we can best benchmark."

This article is part of a series of features exploring ESG data.

  • To read 'The ESG data files – introduction, click here
  • To read 'The ESG data files – part one: reported data', click here
  • To read 'The ESG data files – part two: non-reported data', click here
  • To read 'The ESG data files – part three: ESG rating agencies', click here
  • To read 'The ESG data files – part four: fixed income data', click here
  • To read 'The ESG data files – part five: the impact of the EU's taxonomy', please click here
  • To read 'The ESG data files – part six: TCFD and the challenge of looking forward', click here