Roundtable: Social impact moving in the same direction as the ‘E’ in ESG
Measuring the social value of real estate asset is riddled with complexities, but targeting positive social impact is increasingly paying dividends and should not be uncorrelated with financial returns. Sunita Mahant also highlights the importance of considering diversity, equity and inclusion issues to generate social value for real estate.
This article was originally published on PERE magazine. Click here to read the full version. Below is a summary of Sunita Mahant’s quotes.
The recent turmoil in capital markets and the drop-off in fundraising have affected all corners of the private equity real estate sector, including impact strategies. While there has been much supportive rhetoric around delivering on ESG goals, investment managers have struggled in the past year to attract communities from investor to new impact vehicles. However, ESG remains a priority for investors, according all participants at this roundtable.
A gap exists, nevertheless, between progress on the ‘E’ and the ‘S’ in ESG.
Environmental considerations are increasingly integrated into virtually every aspect of a property in an investment portfolio, from development to sale. But the focus on social value is still a nascent development and common definitions and benchmarks are not yet available. Investment managers therefore have their work cut out for them in making a clear link between social impact and value creation.
Whatever the label, doing good does not mean compromising on returns. “Generating the returns is fundamental: we look at sustainability in terms of risk and returns levers for performance. It is about finding the right solution and the right tools for value creation and protection. We have strong ambitions for our capital to be constructive by intentionally investing to generate positive impacts on the environment and the communities, in addition to generating a financial return”, says Sunita Mahant, Managing Director, Sustainability at CDPQ.
Quantifying the social value of a property and establishing standards to measure it remains a challenge. Several initiatives have emerged in the recent years to measure progress on that front, including WELL, Fitwel, GRESB and the Social Value Portal in the UK, notes Sunita Mahant. “These initiatives and standards offer diverse perspectives, and they all have something to offer. But I do not think there is a single formal benchmark or that everybody is at the same place. Bringing all these bodies together is the challenge.”
Creating social value is also closely linked to diversity, equity and inclusion considerations, Sunita Mahant adds.
She cites the design of a restroom in an office building as an example: a female designer is more likely to address issues that affect how comfortable and secure a woman would feel in such a location, such as ensuring the availability of feminine hygiene products or that doors go all the way to the ground. These design and operational elements go directly to the impact of the human that is using these buildings, Mahant notes.
“You need to have diverse perspectives around the table to highlight some of the things that people value like safety, security, wellness, inclusion and a sense of belonging.”
Overall, regulation has been the leading driver behind the increasing focus on the environmental performance of a building, and similar developments in the social space would produce a comparable outcome, the participants agreed. Financial markets must also be redesigned to price in sustainability. Investment managers themselves have a responsibility to be proactive and drive the process of maturity, counters Mahant. “I do not think it is a matter of sitting around waiting for laws to change. With the right partners and being at the right place at the right time, you can play that role of influence.”
Creating alpha in places where people want to be
Thriving communities can be built in every real estate asset class, says participants at this roundtable. Creating social impact is about placemaking, adds Sunita Mahant of CDPQ.
“You are creating and developing places where people want to be. An asset with strong social impact performance will warrant a premium, like how people value green buildings. If we think about return to work and the flight to quality, social components form part of the design and operation of an asset. The experience of each end user matters to our tenants. Health, wellness, safety, accessibility, transit, community all have a value.”
Buildings focused on health and wellness also warrant a higher rent, she argues, citing a recent study by the Massachusetts Institute of Technology. The research found effective rents for healthy office buildings in the US that comply with Fitwell and WELL standards are between 4.4 percent and 7.7 percent higher per square foot than their nearby non‑certified and non‑registered peers. “If you think about where your assets are located, whatever asset class it is, the community around it has an impact on the value of that property, adds Sunita Mahant. Contributing to that community by creating a space for people to come in and use, whether it is supporting local community programs, or creating space for an artist to showcase their art, matters because it impacts the value of your asset.”