Today’s investors always want to know how their fund managers are integrating environmental, social and governance criteria into both their business and their investment operations.
We started formalising our ESG policies and procedures around two years ago, but, in essence, ESG has always been part of our business. B&I has always placed tremendous emphasis on good governance when making investments and in running the company.
Corporate governance is one of the most important areas to assess in the investment process, so we carry out hundreds of meetings with REITS in our universe which give us the ability to assess managements in a way that third party ESG rating firms cannot - as they often rely on self-reporting.
It usually follows that strong corporate governance leads to a focus on the sustainability of its assets, transparency in reporting and alignments of interests with stakeholders.
Although we are a small organisation, we have policies with positive impacts on the environment and society. As a new member of UN PRI we will be required to incorporate a set of principles of responsible investing. We have put in place our own policies that address each ESG category. For example, we have created travel, purchasing and waste management policies to reduce our footprint and are looking at additional means to offset and measure our results.
At the governance level, our corporate board is made of highly respected professionals with successful careers who bring a lot of input into our company’s strategy. The majority of the board is independent. The board is not only concerned about the firm’s profitability, but also its direction and reputation.
Most of our employees are invested in the funds we manage and invest on the same terms of other investors. In 2018, we took that addition step of unbundling research and execution. We pay all research costs from our management fees and were able to lower transaction fees to the fund. Although we were not required to take this step, we felt this would be a common practice and would improve the transparency of the fees that the investors pay.
When we started formally integrating ESG into our investment process, we started by choosing the environmental, social and governance factors which we deemed to be the most relevant for assessing REITs. As REITs are often small organisations and the scope of their activities is limited, we found classical factor tables included activities often outside the scope of a REIT. For investments not covered by GRESB, we have created a questionnaire and thankfully many REITs have their own sustainability reports.
We are not able to do our own benchmarking on many ESG factors but we believe our internal assessment of corporate governance is one of our greatest strengths. REITs with the best corporate governance will also voluntarily invest in their properties to reduce environmental impact, will invest in their employees and will support their communities as management teams understand that sustainability will lead to strong performance.
As a member of GRESB, we have access to ESG data and benchmarks for roughly 50% of our holdings and actively encourage management teams to complete GRESB’s surveys so they can be benchmarked against peers and have their strengths highlighted. We have started to combine the GRESB data with our own governance assessment, as we believe that we are in a better position to assess corporate leaders due to our day-to-day contact with them.
We are not activists, but we are active in discussing corporate governance and REITs, which have taken our suggestions on board, have often seen improvements in market perception. In one particular case, a REIT’s GRESB scoring also improved dramatically and the units significantly outperformed the benchmark.
We also subscribe to Green Street Advisors, whose research focuses on 10 key variables including board make-up, anti-takeover devices, remuneration and other information useful in comparing US and European REITs’ corporate governance.
When we consider a firm’s corporate governance, it is not just from the position of an investor. We believe sustainability of a business is achieved when the interests of all parties can be aligned. How REIT management interacts with its investors, maintains its properties, manages its tenants and suppliers are all important factors. Moreover, how management deals with the regulatory environment is important.
As such, our criteria, while focused predominately on corporate governance, tries to focus on several elements. For example, while many REITs have invested into energy efficiency in order to lower costs, there may be some areas where REITs need to invest in order to meet newer standards. Thus we need to understand if the management has predicted future investment in those areas, set aside enough capital for compliance and thus whether they are in a position of strength or weakness. Here you can see how governance and environmental criteria can merge.
Originally published in APREA Knowledge Brief vol. 1