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Ethical investing in property

For financial professionals only

Parmenion’s award winning Strategic Ethical Active solution was launched in 2012 in collaboration with leading ethical advisers. The solution offers a choice of 4 Ethical Profiles: A, B, C and D. Property is held as a diversifier in all except D.  Investment Manager Mollie Thornton explains why.

Our Ethical profiles have some exposure to bricks and mortar property because it provides good long-term returns from rental income and growth, acts as a diversifier against equity, and provides some downside protection during market falls.  Property is held in the low-middle Risk Grades of Profiles A, B and C.

How can property managers allow for E, S and G?

Property is a long-term asset with a useful life measured in decades. Property managers must consider the long-term outlook – e.g. need for refurbishment, potential for conversion to alternative use, risk of flood damage etc.

Social and environmental trends like working from home and climate change make risk analysis even more important.  We look for investment managers who embed Environmental, Social and Governance risks and consideration into their process and take a view that reflects the long-term, and relatively less liquid nature of this asset class.

Commercial property managers report increasing demand for sustainable buildings, which can be measured by certifications such as BREEAM (Building Research Establishment Environmental Assessment Method) and LEED (Leadership in Energy and Environmental Design). Demand is partly driven by tenants own sustainability targets and need to reduce energy usage and improve waste management.  An inspiring working environment can also help them attract and retain talented staff.

This is particularly important in the office sector.  After COVID 19, more workers may choose to work from home, which could mean an excess of office space.

Regardless of this, it seems that tenants expect offices to fulfil increasingly high standards.  Fund managers who don’t risk their buildings becoming obsolete and failing to secure high quality tenants.

The move to sustainability

To meet this demand, fund managers are refurbishing their properties to include more ventilation and natural light, energy efficient heating and cooling systems, LED lighting and electric vehicle charging points. Parmenion are part of this trend, having moved to offices with the highest sustainability standards in 2019.

Property managers with an ethical focus are increasingly agreeing “green” lease clauses with tenants. These often include the need for tenants to meet targets on waste recycling, avoid work which could lower the energy efficiency of the property and share data on energy usage with the property owner.  This helps drive further improvements over time.

The challenge for negatively screened portfolios

While there are many ways to improve the sustainability of their assets, a property manager never has full control over the tenants who lease the buildings. The ability to reassign leases or sub-let means it’s simply not possible to implement strict negative screens to restrict certain types of tenants.  An ethical investor may, for example, wish to avoid exposure to a bookmaker renting a shop or a tobacco company renting an office.

In some cases, the property manager may not have full disclosure of all tenants, so property may not be suitable for investors with very strict ethical preferences. That’s why it’s not included in our Ethical Profile D.

A balanced view

Property may not be a traditional “ethical” investment, but we are encouraged by developments to improve buildings from an environmental perspective and the positive social impact that comes from improving our surroundings.

Property managers must keep up with sustainability standards to avoid falls in the rent they can command, or increased voids. That would mean financial loss for investors.