Responsible Investor

RI Interview: Paul McNamara, co-chair, UNEP FI Property Working Group

Why sustainability has an impact on real estate value and should play a central role in investment decisions.

Paul McNamara chairs the Institutional Investors Group on Climate Change (property workstream), and is co-chair of the UNEP FI Property Working Group. He is head of property research at Prupim.

Where does the sustainability debate stand at present?

Usually, when I speak on this topic I identify two paradoxes at the heart of the sustainability debate in property. One is that ‘98% of the debate is about 2% of the problem’ by which I mean the focus is overwhelmingly on development but only 2% of the stock is being added to, each year. The industry needs to concern itself with existing stock; new development is the slow lane for property to make an impact. The second paradox is that ‘those with the power don’t have the knowledge and those with the knowledge don’t have the power’. Until now, the investment community has sub-contracted this issue to the technicians in their organisations. Typically, these individuals don’t make the major decisions on assets. Therefore, my sights are firmly trained on helping investment fund managers see that it is in their interest and, indeed, understand it as their fiduciary duty to understand this issue and what its likely impacts on value might be.

I am pleased to report that this issue has risen rapidly up both the research and business agenda. In 2003 we began researching the issue of how much is sustainability affecting current value. Around that time we also sponsored a session on ‘sustainability’ at the European Real Estate Society conference where we told academics that the industry needed them to focus more actively on this area. Sadly, for a variety of reasons, the wider property research community has only recently really started to show significant interest in this area.

Why should sustainability affect value?

Firstly, if tenants, perhaps through their CSR policies, increasingly decide that they want to be seen occupying green buildings, then a differentiation in rental levels will likely develop between green and non-green buildings. Such differences amount to a form of accelerated depreciation for non-green buildings as they gradually become relatively less attractive. Of course, the owners of non-green buildings might inject capital to get them up to the new standard – but that’s just depreciation by another name. Either way, from an investment perspective, the owner of the non-green building has seen relatively lower performance. Furthermore, non-green buildings are, by definition, likely to be less

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