Is an Influx of Real Estate Capital Chasing ESG Investments?

Authored by Jonathan Needell, President and Chief Investment Officer

June 6, 2022

Environmental, social and governance (ESG) has become top of mind for myriad businesses today.

With awareness about climate change and social justice expanding, capital is increasingly being deployed to companies that proactively uphold the values of environmental stewardship, as well as diversity, equity and inclusion. In fact, ESG assets could hit $53 trillion by as soon as 2025 and ESG investments are expected to reach $1 trillion by 2030.

As seasoned investors in commercial real estate, Kairos has noted significant evidence that capital is also chasing ESG investments in the real estate space. Here is what we’ve observed.

Worldwide real estate investors say that they are including ESG in their investment criteria.

Real estate investors are planning to increase their allocations to transactions that honor ESG.

According to CBRE, 60% of respondents to their 2021 Global Investor Intentions Survey indicated that they had already adopted ESG criteria as part of their investment strategies. The firm also notes that reduced carbon and operational emissions is a central goal for CRE companies, with green construction materials more widely available and ESG-focused regulatory requirements on commercial properties continuing to tighten.

At Kairos, ESG is one of our core principles. As we work to provide quality affordable housing, promote positive community support, reduce our carbon footprint, and invest in our people, we incorporate sustainability into our daily operations and plan to continue doing so well into the future.

Allocations to ESG-focused alternative assets are predicted to skyrocket.

The alternative investments category is attracting a growing cohort of ESG-minded investors. Preqin reports that 80% of investors in alternative assets such as real estate intend to have an ESG plan in place by 2023, with $3.1 trillion of private capital assets managed by firms committed to ESG investing.

Real estate stands to reap the benefits of this trend. Experts say that real estate accounts for 22% of alternative assets managed by ultra-high net worth investors, making it the second-largest holding in alternative investment portfolios of the ultra-wealthy.

With so many alternative asset investors leaning in to ESG and real estate, it follows that a sizeable amount of this capital is making its way into real estate, and that investment in the sector will increase as real estate becomes increasingly committed to environmental and social causes.

ESG’s impact on real estate is quantifiable.

Assessing the numerical impact of incorporating ESG principles into real estate development and operation is becoming easier.

According to Investment Executive, clients interested in investing in commercial real estate are now increasingly able to measure the ESG performance of individual developers. And, most large investors in Canada, for one, have sustainability ESG teams who view real estate as an opportunity area because of well-developed sustainability programs.

As we move closer to our “net-zero by 2050” goals, methods for quantifying the effect of ESG initiatives on property performance are growing more prevalent. CBRE notes the rental gap between green and less sustainable properties is widening, with green properties commanding higher rents than their browner counterparts.

Kairos has seen this play out in our own investments. In 2020, we published our first-ever Annual Impact Report, which measures the effectiveness of our sustainability efforts on the properties we own and operate. Through these efforts, our 90% minority-owned and 38% minority-led firm was able to save $568,273 in annual expense cost savings, with a 17% weighted average return on cost and 5.9 years of average payback. We look forward to improving upon these numbers in the years ahead.

As the world brings sustainability and social justice into sharper focus, we’re seeing investors place greater amounts of capital into real estate assets that further ESG principles. With global real estate investors increasingly including ESG in their investment criteria, allocations to ESG-focused alternative assets predicted to skyrocket, and the impact of ESG on property performance becoming more quantifiable, investments in these assets are set to escalate in the coming years.

* This content is meant for informational purposes only and should not be construed as a recommendation, an offer of services, or an offer to sell, or solicitation of an offer to buy a particular security or investment strategy. There are no guarantees that any specific investment strategy will be profitable or equal to past performance levels. All investment strategies have the potential for profit or loss. The views and opinions expressed in this article are solely my own.

For questions, contact investor relations at investorreporting@kimc.com or 949-800-8500.