Natasha Browne explores the potential of responsible real estate investing for pension portfolios
Last week, the Law Commission confirmed that pension trustees could take ethical and environmental, social, and governance (ESG) issues into account where it is "financially material" to the scheme (PP Online, 1 July).
As evidence increases that human behaviour is having a detrimental impact on the world, there is growing pressure on institutional investors to help make a change. While the Law Commission was clear this cannot trump financial gains, it also pointed out there was nothing holding trustees back if it had no significant financial impact on the fund.
According a to a report from Hermes, property is a sector were taking a socially and environmentally responsible approach can pay off. Introducing Responsible Property Investment Report, its chief executive Chris Taylor says: "We have emphasised how responsible investment enables investors to release social capital as well as capture the purely economic benefits of real estate."
The Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report observes that carbon emissions are likely to be the main cause of climate change, and the report focuses on this.
Hermes 2013 responsible property management program managed to reduce carbon dioxide emissions on a like-for-like basis by 4% between 2012 and 2013. It did this through continued energy monitoring and management across its individual properties. This was helped by an 11% cut in electricity use at its Clarks Village property, which was achieved with the installation of solar or photovoltaic panels. It also cut electricity use by 24% at Wimbledon Bridge by using light sensors and installing LEDs in common areas.
Taylor says: "The economic and social benefits for responsible investment in green and energy efficient buildings are compelling. However, for the business case to match investors' expectations it often requires them to take a longer term perspective in investment appraisals, in particular when it comes to measuring the associated risks and matching returns criteria.
"The investment performance tends to be strengthened when made over longer time periods and when seen through a wider lens encompassing the whole investment process."
The Building Research Establishment Environmental Assessment Method (BREEAM) is a global environmental assessment method and rating system for buildings.
According to the United Nations Environment Programme (UNEP) Finance Initiative, a UK study found BREEAM-rated office buildings were associated with a 16% to 20% increase in rental transaction prices and an 8% rise in sales prices. The Institute for Building Efficiency's 2013 Energy Efficiency Indicator survey also said a third of tenants were prepared to pay a premium to rent a green building.
Hermes Fund Managers chief executive officer Saker Nusseibeh emphasises the importance of long-termism in responsible investing. He says: "While the wider economic and social benefits of this approach are self-evident, a longer term view must be taken by investors if returns are to match expectations.
"To capture the best opportunities, the tools and methodologies to identify and assess them must be embedded across the investment process."
The Law Commission was adamant that trustees should prioritise investing for realistic returns over the long-term rather than trying to maximise short-term returns. The report's authors suggest responsible real estate investing has the potential to help trustees balance their ethical considerations with long-term returns.
Occupational pension provision has continued to grow in value, but there remains large variance in incomes across the pensioner age group, according to latest government data.
Defined benefit (DB) schemes could have an aggregate surplus by 2021 under Pension Protection Fund (PPF) projections, its strategic plan for 2018 to 2021 reveals.
Investment consultants are failing to recommend products that outperform net of fees, the Competition and Markets Authority (CMA) has said as its investigation into the market continues.
This week's top stories included coverage of the much-anticipated defined benefit (DB) white paper and the sector's reaction.