Climate change could dramatically alter the value of real estate investments.
And that goes for real estate investment trusts, companies that own income-producing real estate, if they do not shift their investment strategies to address growing risks, industry experts say.
A 2018 report found that 35% of REIT properties have geographic exposure to climate hazards, including inland flooding, typhoons or hurricanes, and coastal flooding and elevated sea levels. The research evaluated 73,500 properties owned by 321 REITs.
The report, which was published by climate analytics firm Four Twenty Seven and real estate technology company GeoPhy, did not take into account what the properties were doing to address those threats.
“I see elevated risk when it comes to REITs that might be overexposed in areas that are close to sea level and coastal,” said Andre Shepley, product manager and research team leader at Truvalue Labs, a provider of sustainability data analytics.
But for individuals who want to invest in REITs with climate risks in mind, there’s good news: Environmental, social and governance, or ESG, investment strategies in this sector are growing.
The number of property funds and REITs that use ESG strategies climbed to 108 in 2018, with $272.4 billion in assets, according to US SIF: The Forum for Sustainable and Responsible Investment, an advocacy organization. That is up from 30 strategies and $24.4 billion in assets in 2010.
“We’re seeing fast growth in that specific segment over eight years,” said Meg Voorhes, director of research at US SIF.
Still, that asset growth is not as strong as private equity and venture capital sectors have seen in that time, Voorhes said.
The top ESG criteria that those strategies were looking for in 2018 included governance; climate change and carbon; community relations and philanthropy; pollution and toxics; and green building and smart growth, according to US SIF.
“Getting more investors investing on a sustainable basis will encourage more companies to adopt more responsible behaviors,” said Sam Adams, CEO and co-founder of Vert Asset Management, an ESG asset manager.
“That’s the mission: Make sustainable investing easier so that more money moves into sustainability and public companies are encouraged to adopt ESG practices,” Adams said.
For investors who are looking to incorporate sustainable REITs into their portfolios, there are new developments popping up to help make that easier.
Green real estate index
In December, global index, data and analytics provider FTSE Russell launched indexes aimed at helping investors assess climate risk in their real estate portfolios.
The FTSE EPRA Nareit Green Indexes were created to provide a sustainable extension to the FTSE EPRA Nareit Real Estate Index Series.
So far, one index has launched, but there are plans to expand to a number of strategies, according to Tony Campos, head of ESG, Americas at FTSE Russell.
The initial launch includes one green developed index. The product evaluates the green building metrics within each REIT and then weights them in the index based on how well they score, Campos said.
Those measurements include energy use, carbon emissions and green building certifications. The companies with better green metrics are over weighted, while the ones that have lower scores are under weighted.
There are currently no investment products based on the index. For investors, it can help provide evidence that a green-tilted REIT strategy can perform well, Campos said.
“By comparing that to a standard strategy, you’re able to see the difference, both from a performance and risk perspective, but also from a climate and environmental perspective,” Campos said.
FTSE Russell’s clients predominantly include asset managers and asset owners. For individual investors, that means they have to be working with a financial advisor who has access to this strategy in order to utilize it.
ESG real estate mutual fund
When Vert Asset Management asked financial advisors what asset class in sustainable investing hadn’t gotten enough attention from asset managers, one of the top answers was real estate.
In 2017, the company launched a mutual fund — Vert Global Sustainable Real Estate Inst — focused on ESG real estate investments.
“We choose the REITs that are most committed to sustainability out of all the publicly listed REITs in the world, and then we buy and hold them,” Adams said.
The qualities Vert is looking for include efforts to reduce greenhouse gas emissions, good corporate governance and green building certifications, among others.
The company screens out REITs that have ties to the fossil fuel industry or prisons. It also scores REITS based on how well they are adapting to risks like rising sea levels, floods, heat and water stresses, and hurricane risks.
“We want to own the REITs that are aware of those risks and are taking steps to address them in their portfolio,” Adams said.
Vert is predominantly working with financial advisors, according to Adams. But individual investors can also access the funds through firms like Charles Schwab, Fidelity and TD Ameritrade.
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At $23.4 million in total assets, the fund is relatively small. But its strategy has been getting noticed by professionals in the industry.
That includes John Gugle, who serves as chief investment officer and business development manager at Alpha Financial Advisors, an independent fee-only investment management firm that is starting to integrate more ESG strategies for its clients.
Gugle saw Adams speak at an April industry event, he said, and was impressed with Adams’ vision of global sustainability. Gugle’s firm hasn’t integrated the fund into its lineup at this point. However, it could be helpful in the event they want to swap out a more traditional real estate fund for an ESG-minded client, Gugle said.
Gugle said he sees Vert’s fund as part of a bigger wave of ESG products that will come to market.
“If you’re an investor wanting this, be patient. It’s coming,” Gugle said. “There’s more companies doing it. It used to be more of a boutique thing. I think it’s going mainstream now.”