The EU’s new Sustainable Finance Disclosure Regulation (SFDR) regulations have effectively drawn a line in the sand for funds and managers across asset classes, helping to focus minds around boardroom tables into taking tangible action. For some the regulation will have acted as a catalyst for the rollout or acceleration of existing ESG strategies, while for others it will have forced conversation to begin at board level.
Even before the EU had unveiled their plans for this ambitious piece of legislation, the issue of ESG had already taken pole position as the number one question on the minds of our investors.
Designed to help investors compare investments for ESG and to prevent a wave of ‘greenwashing’ that is encroaching on the industry, the rules require that fund managers classify investment products into one of three categories; either as dark green funds (section 9), that have sustainable goals as their objective, light green (section 8), which promote environmental or sustainable characteristics but do not have them as an objective or article 6 funds, which have no ESG credentials.
While this process may seem simple and straightforward for a sustainable ‘dark green’ fund, it poses a significant challenge for light green funds. How do you ensure a fund that invests in assets such as property, is sustainable? After all, buildings and property more broadly have traditionally been one of the biggest carbon emitters. If you are a landlord or building manager, how do you influence the occupier in such a way that they minimise carbon emissions from the building they lease from you?
The scale of the challenge and the size of investment needed to meet that challenge is significant. The shape of the response will depend as much on the type of property as the activity and approach to ESG of the tenant occupier, not to mention the manager. It will also require significant investment from both.
Sector examples
In the grocery real estate sector, many of the supermarkets have acknowledged the magnitude of the climate crisis and are already on the front foot with improving the sustainability of their supermarkets, supply chains and suppliers.
By installing solar panels that generate enough power to supply the onsite occupiers as well as to provide renewable energy back to the grid, we are able to significantly improve our assets’ carbon footprint, while generating income.
By implementing smart technology and aspects of artificial intelligence to monitor, map and evaluate and distribute data, we will be able to enhance our occupiers’ use of our buildings and help them to improve customer experience and use of space.
We can also leverage the proximity of our assets to consumers and footfall they attract to create opportunities to support sustainable food production techniques such as vertical farming, as well as implement measures to reduce the carbon footprint of food by localising the supply chain.
By virtue of their location and the activity of the occupiers, our stores are deeply rooted in the local communities they serve, which means they are well positioned to support local initiatives that contribute to the overall well-being of the surrounding area.
Taken together, many of these initiatives have the potential to not only pay for themselves over time, but also create an important source of income to the fund. SFDR will help focus minds across Europe onto the role ESG will have in future investment decisions.
