GRESB says real estate debt funds starting to integrate ESG

“Surprising level of implementation” says investor-backed group

Private real estate debt funds, which have proliferated since the financial crisis, are starting to integrate ESG, according to GRESB, the investor-backed Global Real Estate Sustainability Benchmark, which has today released its first survey looking at the importance of ESG information for fixed income real estate investors.

Amsterdam-based GRESB, which was launched in 2009 by Dutch responsible investors PGGM and APG, and the UK’s Universities Superannuation Scheme, counts some of the world’s largest investors as members, including the Ontario Teachers’ Pension Plan and South Africa’s GEPF.

As a result of investor member interest in seeing ESG factors integrated into real estate debt, GRESB developed a survey to track activity.

Ten funds, representing 7% of the real estate debt fund universe and $5bn in net asset value, took part in the 2015 GRESB Debt Fund assessment.

GRESB says the results show “surprising level of implementation”, with an average score of 48 out of 100. The average management and policy score is 34 out of 100, and overall the average GRESB Debt score for 2015 is 42 out of 100.

But the survey also found that while 70% of participating debt funds have policies that address environment issues at a collateral-level, only 10% disclose the sustainability performance of their collateral.On risk management, 30% of debt funds review the sustainability performance of borrowers, yet none leverage existing corporate ESG ratings to do so.

Currently, none of the participating debt funds provide energy efficiency financing or other specialised sustainability finance products.

The 2015 Debt Survey participants are Aviva Investors, DRC Capital, Hermes Investment Management, M3 Capital Partners, Mesa West Capital, Pramerica Fund Management, TH Real Estate, UBS, UBS Asset Management and Walton Street Debt Managers.

In statement, Sara Anzinger, Manager Real Estate Debt & Fixed Income at GRESB, said: “Given the outsized role that lenders play in providing capital for real estate investment, we want to encourage their engagement in the sustainability debate, not only because investors value participation and transparency, but because lenders can begin to utilise ESG data to better manage downside risks.”

Speaking at an event to launch the survey, Anzinger said that evidence shows that there is a 20-30% drop in default rates for property with good sustainability ratings, suggesting this was an emerging area for performance management.

Going forward, Anzinger said that GRESB would now have a consultation period to gain feedback on its process and assessment.