In his annual letter to shareholders in January, Blackrock CEO Larry Fink laid out how the company was pivoting to putting environmental, social and governance (ESG) principles at the core of its investment strategy. Rather than the tokenistic corporate social responsibility initiatives seen in prior years, Fink’s push for sustainability was grounded both in environmental concerns and solid economics.
Blackrock manages $7.5bn (£5.7bn) of assets and its primary goal is to deliver strong returns on those assets to its investors and shareholders. To prevent the value of its assets under management from plummeting and ensure those returns, its portfolio had to be aligned with global ESG targets.
There is a good reason why the property world and those in residential in particular must heed Fink’s thinking. In the world beyond Covid-19, the UK has a net-zero carbon target for 2050 fast approaching.
With the built environment contributing 40% of the UK’s carbon emissions and housing 14%, the sector needs to get its house in order, especially if it is going to attract investment from broad capital pools.
Apache Capital’s Richard Jackson says: “Increasingly, investors are saying they will not put their money into vehicles that back projects harmful to our environment. This is becoming more than just a fashion for a small minority; it is and should be the new normal.
“Our industry is not immune to this trend. As a major contributor globally to emissions there is a vital role for the industry to play. Property will face top-down pressure from the government, lenders, investors and insurers to ensure that assets are sustainable, meaning they can remain profitable in the long-term and do not become stranded with other industrial relics.”
Encouragingly, this trend is already under way, according to Jess Tomlinson, head of real estate – London, at Barclays Corporate.
“Over the past 12 months we have seen large parts of the real estate market shift from regarding ESG as a corporate responsibility theme to seeing it as a significant commercial opportunity – or, if not addressed, a key commercial risk,” she says.
“In the residential investment space, clients are acutely aware of customers’ focus on their green values, particularly among younger demographics, and the need to align the homes they create with those values. Equally, as investor capital becomes more focussed on the green agenda and more ESG-linked funds are raised, having a clear sustainability strategy helps clients access a broader pool of capital.”
Many opportunities
The ESG push provides as many opportunities for residential as it does challenges.
Tom Hill, director at Savills Planning Economics, says the government may have to offer incentives to accelerate the number of investors and homeowners that make their properties and developments greener.
“If the government is to nudge homeowners and residential property investors to future-proof their properties by making them net-zero compatible, then it will need to introduce stronger incentives to encourage them to do so,” says Hill.
He adds that to an extent this is already happening; the government’s £2bn Green Homes Grant scheme has been designed to provide at least two thirds of what homeowners and landlords spend to make their properties more energy efficient, up to £5,000 per property.
“Less well publicised, but perhaps more significantly, increased scrutiny is now being placed on the mismatch in taxation of gas and electricity – the latter is taxed at a much higher rate than the former. As the government looks to shift houses away from use of gas boilers towards electricity, using heat pumps, one might expect it to rebalance the scales by reallocating taxes so it becomes consistently cheaper to use an air source heat pump than a gas boiler,” says Hill.
“This transition is already happening in the commercial sector and we expect that the government will come under increased pressure to apply a similar logic in the residential sector too.”
Real estate cannot waste any time in ensuring that all new developments are at the apex of sustainable practice.
Recent developments in manufacturing provide the means to make this change. The UK’s modular, off-site sector looks like a potential world-leader in providing more carbon efficient homes, while the innovative technologies of a burgeoning proptech sector can cut pollution, from materials sourcing right through to day-to-day living.
Residential has proved itself a winner throughout the pandemic — a continued strong ESG commitment would add another string to its bow and ensure that its winning days continue long into the future.