Could the Covid-19 global pandemic be the making of the real estate industry in Europe as a socially responsible citizen?
Coronavirus has already rewritten the rules of society and business at great cost to both lives and livelihoods. Governments are playing a vastly expanded role, paying millions of salaries while enforcing social-distancing and stay-at-home orders. Meanwhile, we have a glimpse of life in a lower-carbon world, with emissions plunging around 17% in some parts of Europe.
Across the property sector, there is an expectation that coronavirus is forging a ‘new normal’ which will replace ‘business-as-usual’.
Sector professionals say that with companies’ environmental, social and governance (ESG) factors now in the spotlight, corporate behaviour, and the treatment of employees, clients and suppliers is under increased scrutiny. Social issues – the ‘S’ in ESG – is in the spotlight like never before.
Shuen Chan, head of ESG at LGIM Real Assets, says: ‘I think there will be a much greater expectation for companies to create better outcomes for the wider society, reflecting the increase in community mindedness seen over the last two months.’
She adds: ‘This will involve clear and transparent consultation with communities and care to ensure that we are creating an inclusive public realm.’
Chan believes that this means driving social value at every opportunity. It involves considering what efforts a company can make not only to meet more traditional ESG markers, but how investments can be used to help society better recover from the crisis.
Rethinking real estate formats
LGIM is indicative of what asset managers are doing. As a result of the crisis, this company is giving the design of its office investments a complete rethink. It has decided to focus more keenly upon public health and safety via socially distanced workspaces, supporting flexible working, and using technology for measures which protect employees’ health, according to Chan.
In the residential segment, supporting vulnerable groups such as the elderly in care homes and other living settings is set to climb the agenda, with LGIM targeting investments which provide easier access to essential services, limiting social isolation, and making retail and residential spaces more inclusive.
Elsewhere, influential consultancy giant Deloitte is planning to permanently cut the amount of business travel it does, after using digital tools such as video-call service Zoom during lockdown.
Social issues are a broad category that encompass workplace conditions, health and safety, and employment practice. Covid-19 has widened that scope, with some landlords suspending rent payments for hard-pressed retail and PRS tenants – something which would have seemed almost unthinkable as recently as January.
Ben Sanderson, director of fund management at UK-based fund manager, Federated Hermes, which has a €435 bn global investment portfolio, says property companies need an unofficial ‘social licence’ to operate from the people who occupy or live in close proximity to assets.
‘If you neglect your social contract like the financial services sector did in the build-up to the global financial crisis, then you can’t justify your place. So ESG is more important than ever, which has huge repercussions for operations,’ Sanderson says.
‘You cannot operate like an island because we’re part of society and the impact we make is huge. We own rental apartments in Liverpool and Manchester in the UK and some tenants have been furloughed, lost jobs, or had medical issues.
'We’ve worked with operations managers to set up a buddying scheme for tenants to do shopping for each other to make sure they’re okay, so they can self-isolate. We’ve taken the long-term view on rent arrears because this is so unexpected and we’re not taking a harsh view of tenants who can’t pay rent because we think it’s the right thing to do from a human perspective.’
Covid-19 more important than GFC
According to others, Covid-19 is going to be ‘more important’ than the global financial crisis of 2008 and that social issues are now more important than environmental considerations in the ESG mix.
French investment giant Amundi forecasts new social values are going to emerge, as lawmakers seek to keep public consent for mountainous budget deficits racked up by governments temporarily nationalising millions of individuals and businesses across Europe.
This will spawn fresh regulation and supervision by governments in public health, widening the scope of systemic risk analysis to include non-financial hazards for companies – a departure from pre-outbreak norms.
The business case looks strong for committing to ESG. A link between it and performance of investments during the coronavirus crisis has been found in research by US-based global investment manager, BlackRock. The world’s largest asset manager found 88% of investment funds with strong ESG ratings lost less than those with weaker ESG profiles in the year up until the start of May.
Also, the role of real estate is going to be major in shaping the new normal after Covid-19. Studies have found office workers can spend around 90% of the day inside buildings, while up to 40% of carbon emissions in the UK come from real estate.
Savills recently captured headlines with its design for a new ‘socially distanced’ office format. But the industrial/logistics segment was already making strides in the area of staff wellbeing prior to the pandemic. Developers such as Prologis, along with smaller developers including Trixtax Eurobox, have been delivering assets to promote staff wellbeing, in what is a long-term trend for the segment.
So here, Covid-19 is accelerating the trend that pre-existed as e-commerce grows and shops remain shut for weeks. Nick Preston, fund manager at Tritax Eurobox, says there is ‘strong evidence’ that good wellbeing cuts staff turnover and improves productivity. ‘ESG is moving up the agenda with a real focus on the non-financial side of the business.’
Measuring wellbeing
One challenge he pinpoints is how to quantify the outcomes of future social campaigns. It is complex to quantify a state of ‘wellbeing’, whereas it is relatively simple to track how much carbon an asset emits during its lifespan in environmental campaigns such as the popular ‘net carbon zero’ target.
David Hirst, head of real estate & private markets sustainability workgroup at UBS-AM, says: ‘While environmental considerations have started to become mainstream in assessing real estate and infrastructure, the “S” in ESG has been traditionally harder to measure.’
He explains: ‘We recognise that standing investments – offices, shopping centres, industrial estates – benefit local communities even though it may not be obvious at first sight. As such, one of our key ambitions in this area is to quantify a social value for the portfolio as a whole. That social value is the value to the community, and this is important to both UBS as manager and to our investors.’
In a bid to fill this measurement gap, UBS undertakes appraisals of a sample of its portfolio, working with tenants and management teams to understand and measure factors such as local employment levels, traineeships, jobs for young offenders, community events held at the property and volunteering.
An external firm called Social Value Portal crunches the data in a system called TOMs and UBS gets a monetary value for each property using a framework. TOMs is a social value assessment tool widely used by local authorities in their procurement processes. The social value is then mapped against the UN’s sustainable development goals. LGIM, who PropertyEU spoke to earlier for this article, also uses Social Value Portal.
What about the ‘E’ and ‘G’?
But could the ‘E’ and ‘G’ in ESG be neglected if social issues take up more time and resources of firms in the wake of coronavirus?
‘What we found is that the S in ESG has taken the back seat somewhat in the past five years, just because everyone’s aware of climate change and it is more easily quantifiable,’ says Helen Drury, sustainability lead at Tritax Eurobox.
‘Anyone focussing on environmental issues has a 10-year climate change strategy, whereas social projects are typically two to three years in length. So I believe environmental campaigns will stay because they tend to be long-term by nature. Indeed, Covid-19 might result in more environmental campaigns.’
Rob Sim, managing partner at Europa Capital, is confident the ‘E’ and ‘G’ ‘definitely’ will not be neglected, pointing to campaigns such as GRESB – an ESG benchmark scheme for real estate - and the UNPRI, a policy framework for responsible investing
‘Our commitment to improving our environmental credentials is increasing and on governance, as a regulated entity, adherence to the codes and principles set out by the FCA (UK regulator) and other international regulators is fundamental to our business and includes regular training and monitoring.’
Hirst of UBS says: ‘We believe that this increased focus on social factors won’t be at the expense of environmental or climate considerations in cases where institutional landlords have set long term targets and have significant programmes already in place.’
Social outperformers
So which countries give us a glimpse of what a more socially conscious future may look like? Europe already has examples of best practice, according to Preston.
‘There’s a very clear gradation that ESG is more prominent the further north you go, such as Sweden and the Nordics,’ he says. ‘Spain and Italy have traditionally focused less on ESG. In terms of where the growth comes from, it will be higher in the north because the standards are very strong and companies have social barometers. For example, SMEs in Germany have a great reputation for looking after workforces and being good citizens.’
‘S’ issues were also high up the agenda of some office and retail segments before coronavirus became a global crisis, in early March. At the start of February, Marnix Galle, the executive chairman of Belgian office and residential developer Immobel, told PropertyEU that ESG is now good for the firm’s bottom line and is no longer a costly status symbol.
‘I think Covid is pushing a lot of investors down a road they were on anyway,’ says Sanderson of Federated Hermes. ‘If you keep a long-term focus, then you will outperform. Different companies are behaving in different ways, but there is a greater acknowledgement that relationships with community stakeholders need nurturing. The idea of an asset with no regard for the wider community is now a non-starter.’
Tritax Eurobox’s Drury adds: ‘We are pushing at an open door and now it’s going to really start to pay off because Covid-19 is accelerating several things and is causing seismic shifts. This is one of them.’ ‘The impact of the crisis will be felt for a long time,’ sums up Chan of LGIM.