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Building blocks for the low carbon economy: Managing climate risk in real estate investing

Climate change poses clear and material risks to real estate assets with the potential to impact return profiles. This paper focuses on listed real estate, which has historically lacked appropriate tools to allow investors to assess their exposure to climate risk and to integrate it effectively in their investment strategies.

Helping to address this gap, the FTSE EPRA Nareit Green Indexes have been developed with data input from GeoPhy, a specialist data provider, and the European and North American real estate associations EPRA and Nareit. These indexes provide a sustainability-focused extension to the FTSE EPRA Nareit Global Real Estate Index Series, a leading global series of listed real estate benchmarks that are tracked by over US$340 billion in assets.1

Solid ground for sustainable investing 

Listed real estate offers investors fertile ground for index-based investment strategies that integrate sustainability concerns alongside financial considerations, due to a combination of:

  1. Material exposure to both physical and regulatory climate risk driven by the long-lived, energy-intensive nature of the fixed assets that define the sector—according to UN estimates, buildings account for over half of global electricity usage and about 28% of global carbon emissions2,
  2. Strong alignment between financial appeal and sustainability credentials of assets with studies linking better environmental performance to higher asset values, higher occupancy rates, higher rental yield and lower operating costs3; and
  3. The availability of a range of well-understood, cost-effective options for greening buildings, ranging from better building design and materials to high-efficiency heating, cooling and lighting.

Nonetheless, there have so far been limited implementation options available to investors to integrate climate and other sustainability concerns systematically in real estate - a sizeable asset class with an estimated US$57 trillion in income generating holdings.4

 

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1 Data as of December 31, 2017 as reported on April 2, 2018 by eVestment for institutional assets, Morningstar for retail mutual funds, insurance products, and ETFs, and additional passive assets directly collected by FTSE Russell.

2 UN Environment, "Towards a zero-emission, efficient, and resilient buildings and construction sector," 2017.

3 Eichholtz, Kok, and Quigley, "The Economics of Green Building," Review of Economics and Statistics, 95(1), 2013, 50-63; Fuerst and McAllister, "Green Noise or Green Value? Measuring the Effects of Environmental Certification on Office Values," Real Estate Economics, 39(1), 2011, 45-69; Miller, Spivey, and Florance, "Does Green Pay Off?," Journal of Real Estate Portfolio Management, 14(4), 2008, 385-400.

4 LaSalle Investment Management, ‘The Real Estate Investment Universe in 2018’.