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Protect the Environment: Invest in REITs

Protect the Environment: Invest in REITs

Even REITs have gone green.

As more investors focus on socially responsible investing, widely known as SRI, they’ve begun to question whether real estate investment trusts (REITs) deserve a place in their portfolio.

While most experts agree that REITs should account for a piece of the SRI portfolio, they also point out that REITs need to improve their tracking and reporting to make it easier for investors to understand environmental sustainability efforts and strategies. “We believe there is a large pool of SRI capital—to the tune of over $2 billion—that would like to move toward the real estate and the REIT industry, but they have been largely prohibited because of lack of transparency,” says David Stanford, executive director of Real Foundations, an Addison, Texas-based real estate management consultancy.

Stanford, who also serves as a judge for Leader in the Light Awards, which are co-presented by the U.S. Environmental Protection Agency’s ENERGY STAR program and the National Association of Real Estate Investment Trusts, contends that most REITs have invested in their own property portfolios to make them “greener”, but only a select few track their sustainable activities. “There’s a pretty clear delineation between the REITs that are making strides and those that either aren’t doing anything or aren’t transparent about it,” he says.

Green Contributes to Financial Performance

It’s not difficult to see how REITs and SRI fit together. It has been well-documented that real estate is responsible for 40 percent of global greenhouse gas emissions, 55 percent of the global usage of wood, and about 75 percent of electricity consumption in the U.S. alone. Sustainability experts contend that more efficient use of energy and other resources can structurally reduce these numbers, decreasing demand for increasingly scarce and expensive natural resources such as oil and water.

There is evidence that improved sustainability performance directly impacts commercial property owners’ financial performance through lower operating expenses and increased investor interest, according to Nils Kok, associate professor at Maastricht University in the Netherlands and founder of the Global Real Estate Sustainability Benchmark (GRESB). The science-based benchmark measures the environmental performance of property portfolios. More than 340 property funds and companies, with real estate assets worth nearly $1 trillion, participated in the benchmark in 2011.

Many property owners report that commercial buildings with energy efficiency ratings command significantly higher rents, boast higher occupancy rates, and achieve higher sale prices compared to conventional buildings. Likewise, a number of apartment REITs indicate that today’s renter is increasingly interested in living in communities that are “environmentally conscious.”

“We have observed that the payback from doing green, environmentally focused activities is pretty high in real estate versus other industries,” say Stephanie Leighton, senior vice president and portfolio manager with Trillium Asset Management.

The Boston-based firm manages the Green Century Balanced Fund, a mutual fund that invests in stocks and bonds that meet its standards for corporate environmental responsibility. The fund, which posted a three-year total return of 15.78 percent as of March 31, 2012, is invested in several REITs including Boston Properties, Forest City and ProLogis, as well as CB Richard Ellis, a commercial real estate services firm. 

Leighton contends that REITs have an opportunity to create “shared value”—a concept introduced by Harvard University Professor Michael Porter that involves creating economic value in a way that also creates value for society by addressing its needs and challenges.

“We believe in the idea of ‘People, Planet, Profit.’ We think it’s good for business,” says Louis Schotsky, vice president of investments and sustainability for Chicago-based Equity Residential, one of the largest apartment REITs in the nation. “We run our sustainability program like a business, and my job is to find creative ways to add value. I think a lot of people think of sustainability as being in conflict with good business, but if you think that way, you’re not going to see the opportunities.”

Pressure from Institutional Investors

It’s worth noting that most property owners have little data to back up their claims that sustainability is good for business. In fact, Kok points out that only 30 percent of respondents to GRESB’s latest survey had any information whatsoever on their companies’ sustainability measures.

“In the commercial real estate sector, we don’t know a lot about the energy performance of our properties,” Kok notes. “Seventy percent of the 350-plus respondents didn’t have a clue about the energy consumption or the energy performance of their properties. I think that without measuring, you can’t start improving.”

The lack of hard, quantifiable data from REITs makes it difficult for investors to make socially responsible investment decisions, experts contend. That’s why so many institutional investors are encouraging REITs and other real estate funds to participate in GRESB and to be more transparent about their sustainability efforts. 

“There’s clear pressure from institutional investors for REITs to step up—not only with their sustainability efforts, but the transparency,” Stanford says. “Several institutional investors have been very vocal about how important sustainability is to them because it has long-term implications for portfolio performance and asset valuation. They want to be able to compare investments, and that’s why they’re looking to GRESB.”

Dutch-pension fund APG Asset Management US, for example, has made GRESB rankings part of its investment criteria. Like APG Asset Management, many of the most influential and sophisticated real estate investors look to GRESB to evaluate opportunities. Stanford says retail investors and their advisors could formulate their SRI strategies by following the path of these institutional investors and paying close attention to GRESB’s survey results. And if that option doesn’t appeal, Lipper tracks nearly 150 “social funds”—of which 86 have holdings in real estate services firms and REITs.

The Role of LEED Certification

When researching REITs to see if they’re a good fit for your clients’ socially responsible investment strategy, you’ll probably come across the acronym “LEED.”

LEED, or Leadership in Energy and Environmental Design, is certification/ranking program developed by the U.S. Green Building Council. The program provides independent, third-party verification that a building, home or community was designed and built using strategies aimed at achieving high performance in key areas of human and environmental health: sustainable site development, water savings, energy efficiency, materials selection and indoor environmental quality.

Nearly 9 billion square feet of building space is LEED certified, according to the USGBC. Most of the commercial buildings that have LEED certification are newly developed and high quality. And, because REITs tend to own newer, high-quality assets, their portfolios include a fair number of LEED-certified buildings.        


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