Green Real Estate

Integrating climate risk into listed real estate portfolios​

Real estate investing has historically lacked the appropriate tools to allow investors to assess their exposure to climate risk and to integrate it effectively in their investment strategies.

To help address this gap, the FTSE EPRA Nareit Green Indexes have been designed to allow investors to identify real estate companies with strong sustainability performance.

These indexes are a sustainability-focused extension to the FTSE EPRA Nareit Global Real Estate Index Series, with approximately US$341billion of assets tracking this leading series of listed real estate benchmarks1.

Additionally, these indexes:

  • Draw on a geolocation dataset from GeoPhy, of over 15 million buildings to assess the sustainability characteristics of real estate portfolios
  • Use FTSE Russell’s tilt methodology to adjust constituent weights based on green building certification and energy usage, significantly improving the climate and sustainability characteristics of the index
  • Meet a variety of investor preferences, by offering an alternative version of the index, which focuses on limiting tracking error to the parent benchmark by minimizing active sector and country weights. This version also provides significant but more modest sustainability improvements
  • Are managed in partnership with the European Public Real Estate Association (EPRA), and the US-based association for REITs and publicly traded real estate companies, Nareit
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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.

Case study

Integrating climate risk into listed real estate portfolios – The 2019 example of BNP Paribas Asset Management’s first ETF to track a FTSE EPRA Nareit Green Index

FTSE Russell has licensed the FTSE EPRA Nareit Developed Europe ex UK Green Index to BNP Paribas Asset Management. In November 2019, the French asset manager launched its inaugural Exchange Traded Fund (ETF) allowing investors to integrate climate risk into listed real estate portfolios.

The real estate sector currently accounts for more than one-quarter of global carbon emissions. According to UN estimates, buildings account for over half of global electricity usage and c. 28% of global carbon emissions [1]. There is also evidence linking better environmental performance to higher asset values, higher occupancy rates, higher rental yield and lower operating costs [2].

The FTSE EPRA Nareit Green Index allows investors to integrate climate risk considerations into their listed real estate portfolio. The index delivers notable improvements in climate and sustainable characteristics while minimising tracking error. To achieve this objective, the real estate portfolios of companies are assessed on two sustainability considerations:

  • Estimated energy usage per square meter and floor space covered by eligible green certification. These assessments are then applied as tilts to adjust company weights to provide greater exposure to those companies with portfolios demonstrating strong sustainability performance.
  • The index also applies a conduct-based exclusion related to the United Nations Global Compact principles [3].

In this video interview, FTSE Russell and BNP Paribas Asset Management discuss the characteristics of the FTSE EPRA Nareit Green Index.

  • Stéphane Degroote, Head of ETFs & Derivatives EMEA, FTSE Russell
  • Isabelle Bourcier, Head of Quantitative & Index, BNP Paribas Asset Management
  • Fong Yee Chan, Senior Product Manager- Sustainable Investment, FTSE Russell

Read the related press release.

Video subtitles [CC] are also available in French, German and Italian. 

 


1. UN Environment, ‘Towards a zero-emission, efficient, and resilient buildings and construction sector’, 2017, p.16
2 .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.
3. The UN Global Compact asks companies to embrace, support and enact, within their sphere of influence, a set of core values in the areas of human rights, labour standards, the environment, and anti-corruption. These core values make up the Ten Principles of the UN Global Compact. Find out more information here: https://www.unglobalcompact.org.uk/the-ten-principles/