As I previewed in my last post, materiality is one of the “6 Trends Driving Sustainability in Real Estate,” and an important focus at Principal Real Estate Investors. In our role as fiduciaries, it represents a critical element of disclosure – recognizing that investors require all relevant and significant information in order to appropriately make decisions. From a sustainability and Responsible Property Investing standpoint, materiality is taking on even greater meaning, and I’d like to share some details on how it frames our work in these areas.
Over the past several years, we have seen a rapid growth in sustainability and corporate responsibility reporting. The Global Real Estate Sustainability Benchmark (GRESB), which I discussed here in September, now includes data from over 66,000 properties, representing over $2.8 trillion in asset value. Participants in the United Nations Principles of Responsible Investment (UN PRI) annual survey account for over $59 trillion in assets. The Carbon Disclosure Project (CDP), NAREIT, the U.S. Green Building Council, and many other organizations now collect, analyze, and aggregate data on sustainability in commercial real estate.
This ocean of information provides a foundation by which we can benchmark progress and assess best practices. But what data is most relevant? Having rapidly progressed from having too little information regarding sustainability and real estate, to perhaps too much, our focus turns to determining what information provides meaning. What information is material to our investment decision making? Many in the investment community recognize this and understand the need to match data and benchmarks with risk assessments and opportunity identification.
For example, policy and financial organizations have initiated efforts to identify what materiality means to the investment community. The Sustainability Accounting Standards Board (SASB) has worked to define materiality for a variety of commercial sectors, with the intention of requiring disclosure of material sustainability information in future 10-K and other financial filings. The U.S. Department of Labor recently revised its retirement plan guidance, stating that consideration of environmental, social, and governance (ESG) matters are part of fiduciary duties. CalSTRS and the United Nations Environmental Programme have published supporting sentiments.
These developments are stimulating discussions on portfolio exposure to “climate risk” and what this means for investment managers. In June, McKinsey & Company released a report stating “Many institutional investors are considering whether to reduce the carbon exposure in their portfolios or even to divest out of fossil fuels entirely.” The MIT Sloan Management Review recently published findings that “Nearly 60% of investment firm board members say they are willing to divest from companies that have poor sustainability performance.” In BlackRock’s September 2016 release of “Adapting Portfolios to Climate Change,” they state that the term “stranded asset” is increasingly being applied to an asset that is at risk from practical, legal, or functional obsolescence when transitioning to a low-carbon economy. And specific to our industry, Mercer’s “Investing in a time of Climate Change” emphasizes that a 2°C climate change scenario could benefit the real estate industry while a 4°C scenario could negatively impact real estate as an asset class.
These findings, in addition to the growing belief among investors that good sustainability performance is a proxy for good investment management (MIT Sloan Management Review), bring new specifics on what is material in commercial real estate. As investment managers, this means we need to further examine the environmental and climate risks (and opportunities) as they relate to our individual assets, our reporting practices, and as part of our fiduciary duty to our clients.
Don’t forget to check out my next post, “Resilience – Managing Real Estate in an Increasingly Volatile Environment.”
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