How is ESG really weighted in investment decisions?
In a world where our children are already being informed about sustainability in school and pre-school, ESG plays an important role in both our private and business lives. But ESG is by no means a new topic. Any analysis of a property and its market positioning has to cover these aspects. If the user (i.e. tenant) no longer sees a sustainable use, he will simply leave. What is left behind, in the worst case, is a "stranded asset".
Institutional investors and banks are more driven by positive public pressure than non-bank lenders, but in combination, they are able to make an impact on the funding market. Lenders therefore cannot hide and say "we are not in charge" because they decide whether or not a real estate investor gets the debt it needs.
A sustainable action begins at the corporate level. Without a sustainable corporate culture, all approaches to long-term investing are pure marketing. To ensure the long-term support of investments in the main interest of our fund investors, all employees are shareholders of the company.
How do we incorporate ESG considerations into our investment decisions? We first pre-screen sponsors and transactions to identify risks and avoid projects associated with negative social and environmental impacts, potential compliance issues or controversial individuals. We make the final determination of the ESG risk profile using our own Risk Score Card.
We are often asked whether the targeted returns are still more important to investors than better ESG characteristics. Since the return on an investment should always reflect the risk it contains, we believe both are reduced with better ESG credentials, and even more so vice versa (so that non-ESG compliance is a major risk for any property). We therefore accept lower returns for loans with a high ESG credit rating and vice versa. As the majority of our commitments come from German insurance companies, our target returns are generally at the lower end of the European market - so for Aukera it is unproblematic to accept potential yield shifts for loans with ESG credentials.
Looking at individual elements that we weight higher, on the one hand we find the “usual suspects” such as environmental reports and certificates, low energy consumption and carbon footprint analysis. In addition, however, we also overweight topics such as a peer group analysis of an individual property, regulatory risks, health aspects or comfortable indoor climate as one of the "real" differentiators even in the distant future.
How will the topic develop in the future? Sustainability goals are undoubtedly important, but overarching goals become mere platitudes if they are not supported by tactical implementation. A continuous analysis of ESG trends such as climate change, regulatory and legislative trends, tenant preferences and fund investors' approach to ESG is necessary in order to draw conclusions on adjustments to one's own ESG concept.
Are more ESG-specific loan fund products being introduced? Obviously yes, but investors should ask themselves if some of these products are more than just marketing. Debt funds usually take an ad hoc investment approach anyway, offering borrowers e.g. additional funds for refurbishments or heavy capex measures as part of a value-add strategy. In our view providing debt for such projects are more sensible than simply entering into competition for properties that already meet the best ESG standards.