An article for professional investors by Kavitha Ramachandran, Maitland’s Head of Business Development & Client Management – EU.
It’s no secret that fund managers are aware of the need to integrate ESG factors into their portfolios; with an up-and-coming generation of tech-savvy, sustainability-conscious ‘Gen Z’ individuals, it’s essential that fund managers adapt to meet the rising demands of current and future clients to stay ahead of the industry curve.
But ESG is not just the latest buzzword on the financial services block; it’s the key to unlocking liquidity in the real estate game. Certainly, the desire to invest in property aligned with ESG principles is nothing new. But with a seismic shift towards ESG investing over the last five years, a recent thought-provoking panel discussion at the ALFI PE/RE conference last November got me thinking: what does this mean for investors with existing property built without ESG considerations? And what role does technology have to play here? The truth is that many real estate assets are at risk of being stranded and investors developing stores of trapped cash if fund managers don’t integrate ESG factors into their real estate portfolios.
To prevent an accumulation of frozen assets, fund managers need to identify ways to truly integrate ESG principles into their real estate portfolio without greenwashing and communicate this clearly and effectively back to the investor.
And nowhere presents a better climate for fund managers to do the former than Luxembourg. By creating a range of labels attributed to different sustainability factors (Climate Finance, Microfinance, Environment, Green Bond and ESG), initiatives like the LuxFLAG clearly define ESG eligibility criteria, creating an environment in which fund managers can take considered steps towards more sustainable financing. Furthermore, a consistent approach to ESG measurement across the jurisdiction ultimately allows fund managers to compare the ESG contribution of their real estate assets against an industry-recognised benchmark. In time, this process not only allows fund managers to better integrate ESG principles into their portfolio but also raise the capital of those sustainable investments and generate better returns for clients.
Monitoring and mitigating risk
To the latter point, what cannot be understated about the dawning risk of stranded real estate assets is the role that service providers can play in monitoring and mitigating that risk. Whilst labels clearly define ESG factors for fund managers to adhere to, without the ability to measure the performance of those assets and relay that information back to the investor, the value of ESG considerations are lost in communication.
This is where technology and data play vital roles. It’s essential that asset servicers enable fund managers to demonstrate value add in line with what the investor values most. We’re seeing the benefits of robotic process automation (RPA) in releasing asset managers’ most important resources from high-volume, repetitive roles to do more demanding and valuable work. Now, asset servicers are and will need to go further by using technology to gather and aggregate ESG performance data and transform this into smart, measurable information – via an easily accessible dashboard from which fund managers and investors can view portfolio performance in real-time – to provide a clear-value-add and continue to shape the future of the real estate industry.
Maitland Luxembourg S.A. is licensed as Professional of the Financial Sector (“PSF”) and is regulated by the Commission de Surveillance du Secteur Financier (CSSF). Maitland Luxembourg S.A. holds a “Conseil Economique Licence” Number 72662. Company no. B 13 583.
The information and opinions herein are for information purposes only. They are not intended to constitute legal, financial or other professional advice, and should not be relied upon as such or treated as a substitute for specific advice relevant to particular circumstances. Maitland as a group or any of its member firms or affiliated entities accepts no responsibility for any errors, omissions or misleading statements in this publication, or for any loss which might arise from reliance on the material. No mention of any organisation, company or individual, whether on these pages or not, shall imply any approval or warranty as to the standing and capability of any such organisations, companies or individuals on the part of Maitland. Before making any decision or taking any action that may affect your finances or your business, you should consult a qualified professional adviser.
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