The case for collaboration - Effective investor engagement in the listed real estate sector

by Shaun Steevens, The Global Real Estate Engagement Network (GREEN)

The impact of collaborative engagement

Collaborative engagements have been around for some time. They form part of a wider set of stewardship initiatives undertaken by investors and their managers engaging with the companies they are investing in^[i]. There are several well-documented advantages associated with collaborative engagement around ESG topics such as helping to build skills and knowledge, increasing efficiency and lowering costs, and emphasizing the importance of issues in the eyes of corporate management ^[ii].

In this article, we briefly discuss the benefits of engagement and collaborative engagement in light of GREEN’s 2022 engagement results and feedback from shareholders and REITs on the engagement process^[iii]. We also consider the findings of recent academic research gauging the value of individual and collective engagement for shareholders in public companies across the MSCI company universe ^[iv].

The Global Real Estate Engagement Network (GREEN) was set up to allow institutional investors in both listed and non-listed real estate to collectively engage in dialogue with companies on their management of (physical and transition) climate risks. It was established to challenge real estate companies to improve disclosure on business plans in different climate scenarios; implement climate change governance structures; establish science-based targets to achieve the Paris goals; and promote the use of certified data including building certification across their portfolios. GREEN’s members have been engaging the public and private sector real estate industry since 2021.

Targets in place in Europe, but lack of credible implementation plans

GREEN recently published its first set of results of its engagements^[v]. The results were gathered from 36 engagements with globally-listed and 20 non-listed real estate companies, 60 climate risk management assessments, and more than 70 survey responses.

The responses revealed that more than half of larger listed real estate companies have set a Science Based Target, and a third have set a Net Zero target. Furthermore, 86% of European companies had a Net Zero target. However, companies lack implementation plans to achieve these targets and are also reluctant to prioritise energy and CO₂ efficiency measures needed to achieve the Paris goals, on perceived cost-benefit grounds.

Collaborative engagement is a “win-win” process

Although the 2023 engagements are now underway, we also wanted feedback from real estate companies’ management teams about engagement and collaborative engagements. We asked a sample of companies in Europe and elsewhere for views on a handful of topics concerning the type of climate risk engagements undertaken by GREEN members and real estate investors in general^[vi].

The respondents noted that some investors, including GREEN members, were asking about the disclosure of physical as well as transition risks. Companies reported they were being asked uniformly about Net Zero targets and Scope 3 disclosures and the adoption of building certification. More specifically, GREEN’s members are interested in long-term asset-level implementation pathways, Capex plans, and the use of internal carbon pricing.

Broadly speaking the respondents felt initiatives like GREEN provide opportunities for cross-region knowledge and practice sharing, with Europe ahead of other regions like Asia. Gabriella Zepf, Director of Sustainability, Group Operations, SEGRO confirmed this “From my point of view, collaborative engagement has the potential to be more efficient for us and is therefore much appreciated. We would welcome that as a preferred approach”, she said.

The respondents felt that GREEN helps companies to better understand investors’ expectations in terms of target setting, implementation pathways, and information disclosure. It was also acknowledged that individual investor engagement played a contributory role in these areas. As Nicolas Jandot, Head of CSR at Gecina suggested, “The questions are focused on what matters most and much clearer than lengthy standard ESG questionnaires”.

Engagement with GREEN encouraged companies “to dig deeper on scenario analysis, and financial estimates of adaptation costs” and demonstrated the importance that investors, particularly European asset owners, attach to achieving meaningful progress on decarbonisation. John Haffner, Deputy Director of Sustainability, Hang Lung agreed. “GREEN helped us to understand some investors’ latest expectations in such areas as internal carbon pricing and transition and physical risks at the asset level”, he said.

Academic research supports the business benefits from engagement

The benefit of engagements and collaborative engagements about ESG-related issues have been researched by academics from Maastricht University ^[vii].

Their study looked at nearly 13,000 private shareholder ESG engagements at approaching 2,500 publicly listed firms worldwide across all sectors of the economy, including real estate, from 2007 to 2020.

The study found firms improve their ESG performance after engagements, relative to peers, with material engagements associated with peer outperformance. They observed material engagements are more often linked to improvements in profitability, sales, and cost ratios, than immaterial engagements.

According to the research, CO₂ intensity decreased after environmental engagements. The researchers acknowledged that this could take some time to show through after an engagement about carbon emissions. A target firm might set long-term targets to reduce emissions, but the time frame of the study did not allow a comprehensive evaluation of the long-term effects of engagement on carbon emissions. Another risk is that the CO₂ intensity decreases, but the absolute CO₂ levels do not, for example, because of an increase in the global building stock. Finally, the research demonstrated that collaborative engagements were more successful, reinforcing a general industry trend of collaboration.

Engagement works, collaborative engagement works better

The feedback from our follow-up to engagements carried out in 2022, suggests real estate companies, value collaborative engagement. The responses provide an interesting insight into the experience of management teams of engagement on climate-related policy, particularly in Europe. An increasing number of investors have similar views.

“Even though we have relatively large stakes in EU and US REITs, we are still a minor shareholder. By being part of a larger group of investors with similar concerns, we believe that the questions we ask and the depth we seek in an active shareholder dialogue will get more due consideration. During these dialogues on Climate Action, we can, when necessary, challenge how managers develop and implement their net zero strategies to achieve their stated carbon reduction targets and report on progress that’s been made.” - Peter V. D. Tol, Senior Advisor Impact Investing and Responsible Investments, MN Services.

Uma Moriarity, Global ESG Lead at CenterSquare Investment Management, went further.

“Given that nearly 40% of end-use carbon emissions are generated by real estate globally, our industry needs to be part of this important sustainability conversation. Our collaborative engagements through the GREEN network are bringing investors together in the pursuit of setting expectations for tangible pathways to achieve net zero targets to appropriately mitigate risks associated with climate change on behalf of global beneficiaries who share these critical concerns.”

Encouragingly, the sentiment expressed by companies and by GREEN’s members supports some of the key findings of the larger engagement study carried out by Maastricht University. The research emphasized that investors aiming to maximize their success rate, should make materiality salient and engage repeatedly. Furthermore, it also confirmed the benefits of collaboration which allows investors to not only share costs but also increase the probability of reaching success.