Ahead of the forthcoming Bisnow conference 'Leading the Charge for a Greener Tomorrow: Embracing ESG in Real Estate' being held at the sustainable Kodak building in London, Arnav Malde and Jonathan Cohen from Howard Kennedy LLP's ESG & Sustainability Practice give an overview of some of the opportunities in investing in sustainable assets.
What are the opportunities for investment into sustainable assets?
A number of experts consider that opportunities for investors lie "within the supply chains of the companies that are popular right now in the ESG universe."[1] For example, Megan Brennan, co-portfolio manager of the Sarasin Tomorrow's World Multi-Asset fund, says that the most challenging environment for sustainable investors is when the sectors they choose to avoid, like fossil fuel and refining, are the best performing. Correlated assets, such as battery storage technology offer diversification benefits to investors.
BlackRock talks about opportunities that are present in 'transition investing' as opposed to 'sustainable investing.'[2]
Transition investing refers to 'strategies that focus on preparing for, being aligned to, benefitting from and/or contributing to the transition to a low-carbon economy.'
The consensus amongst the investment community is that good opportunities for investors can be found in areas/industries that are a part of the sustainability transition.
How are investors underwriting sustainability into their portfolio?
Leading sustainability investors have integrated sustainability into their investment-making decision process.[3] For example, investors may undertake the following strategies:
- link sustainable investing to their mandate – for example, avoiding investment in companies or sectors that may have material sustainability risks; and
- define their sustainable investment strategy thoroughly – deciding whether the ESG factors are more important for risk management or value creation.
Furthermore, Morgan Stanley highlights[4] the following approaches that asset owners are increasingly using to invest sustainably:
- ESG Integration – proactively considering ESG criteria alongside financial analysis;
- Restriction Screening – exclusionary, negative or values-based screening of investments;
- Thematic Investment – pursuing strategies that address sustainable trends such as clean energy, water, agriculture or community development;
- Shareholder Engagement – direct company engagement or activist approaches; and
- Impact Investing – seeking to make investments that intentionally generate measurable positive social and/or environmental outcomes.
Real estate projects - how are lenders and investors assessing risk?
In the real estate sector, lenders are increasingly offering green loan tranches in facilities to finance the development of buildings that meet sustainability standards. Lenders may also offer margin reductions to make their green loans attractive to borrowers.
What lenders are finding in practice is that borrowers who are already providing housing stock that meets increased sustainability standards are now obtaining the more competitive quotes rather than incentivising those borrowers who do not.
Lenders may also conduct increased due diligence at the KYC stage. Banks are increasingly creating borrower-specific climate risk scores and infusing these into the underwriting process for financing. The lender may also scrutinise things such as the borrower's future production plans or how available renewable energy technologies are to power the client's operations. To conduct this level of due diligence, they will likely make use of technology or data application, as well as hire experts with the technical knowledge of environmental trends to embed into their teams.
If you would like to discuss any aspect of sustainable investing, please get in touch with Jonathan Cohen (Jonathan.cohen@howardkennedy.com) or head to our dedicated webpage here to learn more about our relevant services/capabilities in this area.
[1] https://www.ftadviser.com/investments/2022/10/06/the-best-sustainable-investment-opportunities-for-right-now/?page=1
[2] https://www.blackrock.com/sg/en/investment-strategies/sustainable-transition-investing
[3]https://www.mckinsey.com/~/media/McKinsey/Industries/Private%20Equity%20and%20Principal%20Investors/Our%20Insights/From%20why%20to%20why%20not%20Sustainable%20investing%20as%20the%20new%20normal/From-why-to-why-not-Sustainable-investing-as-the-new-normal.ashx
[4] https://www.morganstanley.com/ideas/sustainability-investing-institutional-asset-owners
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