Climate change may have serious repercussions for the whole real estate industry, as noted by a 2018 report by the Four Twenty Seven and GeoPhy, a climate analytics firm and a real estate tech company respectively. The report highlighted a massive increase in climate-related risks and emphasized on a radical shift in investment strategies by those investment trusts that have high stakes in income-producing real estate.
The said report evaluated real estate investments by 321 different Real Estate Investment Trusts (REIT) that owned a total of more than 73,500 real estate properties and analyzed that nearly 35% of these properties were seriously exposed to climate hazards, such as coastal flooding, inland flooding, elevated sea levels, typhoons, and hurricanes. The report, however, did not mention remedial measures (if any) these REITs were taking to mitigate these threats.
Environmental, Social and Governance (ESG) is the term coined to refer towards investment strategies used in this sector to appraise any investment in terms of climate change impact and making remedial measures to counter this impact. The good news for investors is that more and more REITs are moving towards adopting ESG strategies in order to safeguard their investments and to improve investor confidence in these investments.
Among top factors that are used in present ESG strategies include climate change and carbon, governance, toxics and pollution, smart growth and green building and philanthropy and community relations, according to the United States Forum for Sustainable and Responsible Investment. In 2018, as much as 108 REITs and property funds, with combined real estate assets of over $272 billion, have used ESG strategies. The number saw a considerable jump from 2010 when merely 30 REITs with combined assets of just over $24 billion were using these strategies.
Sam Adams, CEO of an ESG asset management firm called Vert Asset Management noted that more and more REITs shall be automatically forced to adopt modern ESG strategies if more investors start making investment decisions on a sustainable basis.
FTSE Russell, a data, global index, and analytics provider, launched its Green Real Estate Index in December, last year. The index which is first of its sort aims at providing an evaluation mechanism for any individual REIT to score and weight its green building metrics. As per the firm’s head of ESG, Tony Campos, the index allows strategic comparison with respect to risk and performance perspective as well as environmental and climate perspective.