Jamestown is guided by five main principles, one of which is responsibility. Jamestown’s commitment to being a responsible organization is woven through internal operations and the external communities we build. No longer solely used for attractive marketing terms or buzzwords, a corporation’s commitment to sustainability and being socially responsible is now a factor being measured and evaluated by many investors. This article will explain the concepts of socially conscious investing, what that means for the future of investment funds and commercial real estate, and highlight the efforts made by one of our properties, Southern Diaries @ Ponce City in attempting to accomplish a sustainable repositioning.
What is ESG investing?
Traditionally, historical performance and anticipated returns are two of the main metrics evaluated when making an investment decision. More recently, investors have begun to focus on an organization’s social impact. Commonly referred to as Environmental, Social, and Governance (ESG) Investing, this new approach is a strategy that focuses on making investment decisions based on a company’s commitment to enacting positive societal change. In the below graphic, we expand on the terms and explain impact measurements that go into the well-known acronym.
The measurements mentioned above highlight a few of the many and varying criteria utilized by ESG research firms to score and rate companies’ commitments and initiatives. ESG rating firms often review information, including annual reports, corporate sustainability measures, employee and leadership demographics, and board structure and compensation. When considering an ESG investment, an investor may review multiple ESG reports to make a balanced and well-educated decision. Furthermore, when reviewing the ratings, one should ultimately consider how the research shows the company’s commitment to its various stakeholders, internally and externally.
What is ESG investing in Commercial Real Estate?
Where sustainability ratings can range and be difficult to measure precisely for corporations, buildings have obvious sustainability metrics. With environmental consequences such as carbon footprints and certifications such as the Leadership in Energy and Environmental Design (LEED), commercial real estate companies have a very clear and external-facing opportunity to showcase their commitment to ESG. From utilizing sustainable construction materials, being conscious of proper land use and environmentally friendly design, or ultimately creating places that benefit the community they’re in, commercial real estate companies can show their commitment to ESG on an external level.
Stakeholders are increasingly demanding investments that drive financial returns through creating social and environmental value. To this end, the United Nations Sustainable Development Goals (SDGs) were established as a powerful framework to guide structured investments towards long-term financial value and social and environmental impact. The SDGs were established in 2015 under the United Nations adoption of the 2030 Agenda for Sustainable Development to end all forms of poverty, inequalities, and negative climate impacts. While the SDGs predominantly focus on government entities, many commercial real estate firms have also recognized their value and are aligning their operations with these goals.
Investor resources such as Principles for Responsible Investment (PRI) also provide clear outlines on due diligence that real estate owners and operators can perform when evaluating purchasing an asset, as well as a questionnaire for investors to utilize when appraising real estate investments. PRI classifies two ESG considerations unique to real estate investing: the long investment time horizon and the direct local impact possible. The organization further stresses that an organized and well-researched plan towards addressing ESG through a real estate portfolio could protect and potentially enhance the investment value. Below is an example of an ESG due diligence checklist that a real estate manager can perform when evaluating an asset.
ESG Trends and Performance
Trends showing capital inflows and investor activity across ESG investments have accelerated. Morningstar reported ESG funds drew $51.1Bn of net new money in 2020, double from 2019 and achieving the fifth consecutive annual record. Furthermore, the amount of ESG funds available to U.S. investors reached over 400 in 2020, an increase of 30% from the previous year.2
The movement to decarbonize investors’ portfolios is being made from large investors to small. In late 2020, BlackRock, the world’s largest investment manager, announced that it would consider ESG impact for 100% of its investments going forward. Also joining the movement, Fidelity, one of the most established providers of index investment products, launched its first two Sustainability – Focused Index Funds in 2017, and since then have added 4 additional funds that provide “investors the opportunity to invest in alignment with their specific values and interests.”3
Furthermore, as the next generation of investors, millennials are leading the charge as trillions of dollars of wealth are expected to be transferred over the next few decades. While investors are primarily focused on profits, studies show millennials, who make up close to 80 million people in the U.S. alone, are considering investing strategies that align with personal values.
Along with achieving alignment on personal values and financial commitments, an ESG investing strategy can result in profitable returns. While past performance is no guarantee of future results, a study conducted by Morgan Stanley, researching the performance of nearly 11,000 mutual funds, found no financial tradeoffs between the sustainable funds compared to traditional funds. However, sustainable funds experienced a 20% smaller downside deviation than traditional funds and provided less downside deviation and strong risk-adjusted returns.4
Correspondingly, research has shown that investing in funds that address ESG issues will significantly impact environmental factors that affect real estate. A recent study conducted by the Journal of Financial economics called attention to the fact U.S. real estate properties exposed to rising sea level are selling at a 7% discount compared to properties with less exposure.
Our Sponsor’s approach to ESG Investing
As an investment manager, Jamestown’s primary responsibility is to add economic value to our investors’ portfolios. The company believes that placing an emphasis on ESG factors will positively impact long-term performance and will continue to be an area of focus for investors.
At the property level, ESG efforts start with the acquisitions process and remain in place throughout Jamestown’s ownership period. Likewise, Jamestown’s long-term investment horizon is well aligned with strategic ESG projects that may have a longer return on investment. Projects aren’t just evaluated based on their simple payback period but are part of a strategic business plan that considers multiple financial metrics and other factors such as lease turnovers and municipal energy and carbon standards. Jamestown believes that these investments make good business sense for tenants and investment managers and make the properties more resilient. By working with partners, employees, and other stakeholders, Jamestown is confident in its ability to utilize resources responsibly while achieving superior results. The company envisions a future where sustainable development principles and operations are integrated into every aspect of company operations and investment strategy.
The image below showcases the environmental initiatives across the Jamestown portfolio.
Does Southern Dairies @ Ponce City Market Constitute ESG Investing?
At Southern Dairies, we have installed bike racks and have provided tenants access to a shuttle that runs to nearby public transportation to promote sustainable commuting alternatives, and have implemented single-stream recycling on-site. Along with our environmental commitments, we recently sponsored an anti-racism series led by current tenant, the Lola.
Conclusion
We’ve all heard the term “vote with your wallet.” This term, primarily used in consumer spending, is the practice of allocating expenditures that are consistent with your values. As mentioned earlier, trends showing capital inflows and investor activity across ESG have accelerated. When considering diversifying your traditional portfolio to alternative investments, we recommend that individuals critically research a Fund’s investment thesis and potentially broach topics such as their ESG impact strategy.
“At Jamestown, we focus on efforts to reduce our impact on the environment, and support the larger communities where we own properties.” – Matt Bronfman
by Jamestown Invest
Jamestown Invest is a direct-to-consumer platform, connecting U.S. individuals directly with real estate managed by Jamestown.