Real estate offers a robust way for investors mindful of ESG issues to put their ideas and values into action, the author of this article says.

As investors increasingly look to combine “profit with purpose”, Eric Mounier, chief executive of Avignon Capital, a European investments firm, argues that property investment is the “perfect platform to do so”. The author has 25 years of experience in commercial property in the UK and Europe. The views of the author are not necessarily shared by this publication; the editors are, nonetheless, pleased to share such arguments and invites readers to respond. Email tom.burroughes@wealthbriefing.com

The UN Sustainable Development Goals, agreed in September 2015, gave momentum to what has been dubbed “the age of impact” - a time when corporations are looking not only to seek financial returns through their business activities, but also to deliver a positive societal and environmental impact. 

A year and a half on, investment firms across the asset management industry are looking to incorporate these sustainable principles into their products. Investors are increasingly realising that environmental, social and governance factors have an impact on returns. Across all asset classes, a push towards eco-/socio-friendly products is visible. Indeed, a Morgan Stanley report calculates that sustainable investing has seen 135 per cent growth from 2012-2016.

The growth of socially-responsible investment products has come in direct response to growing demand from investors, and whilst a broad range of investor types is showing an increased interest in sustainable investment, family offices and millennial investors are leading the way. 

According to a recent survey, 86 per cent of millennial investors are interested in socially responsible investing, whilst the latest UBS Global Family Office Report showed that 61 per cent of family offices are now active or expect to be active in impact investing. It appears that the growth in interest about the issue of sustainability among family offices may be linked to a generational shift, since the same report highlighted that 43 per cent of family offices expect a generational transition in the next 10 years, and 69 per cent in the next 15 years.

If Millennial and family office investors are looking to invest sustainably, which asset class is best-suited to generate “profit with purpose”? 

At Avignon Capital, we believe property investment is the ideal platform to combine profit with purpose, making it an attractive alternative to traditional asset classes, such as bonds and equities. Unlike the traditional asset classes, property investments provide a tangible asset that can offer a higher level of involvement and greater interest in the development of social and environmental policies for the building and, in many cases, the local community.

Investing in properties that embrace sustainable and socially-responsible principles, such as energy-efficiency or active interaction with the local community, provides investors with two major advantages:

-- The ability to directly commit capital to buildings that encourage tenants to embrace eco- and socio-friendly initiatives, such as recycling schemes or hosting events for the local community; and 
-- The forecast of strong financial returns in the short and long-term, with increased tenant demand for such properties causing an increase in net asset value of real estate that adheres to these principles.

The advantage of real estate is clear; whilst green bonds and equities can give investors indirect exposure to sustainable causes, real estate allows investors to directly interact with properties that uphold these principles, providing a far more engaging investment experience. 

A number of Avignon Capital’s assets serve as examples of sustainable and socially-responsible property investment. These include:

-- A 104-year-old film site in Berlin, which is being improved and developed to create a better working environment for existing tenants; and 
-- The purchase of the Umpsannwerk multi-use campus in Kreuzberg, Berlin, which now houses tech start-ups and has a number of eco-friendly schemes promoted by Avignon Capital. 

The above examples indicate that, even in a market as competitive as Berlin, it is possible to invest in buildings that support sustainable principles, something that is increasingly important to the next generation of family office investors. 

This push towards sustainable real estate is supported further when looking at the return on equity generated by such investments. A report by Bentall Kennedy, one of North America's largest commercial real estate advisors, suggests that investors earn 8% to 10% higher value from sustainable-certified buildings, while tenant renewals are 5.6% higher and occupancy rates are 4 per cent higher.

Returns on property are generated in two ways, with capital gains through the rise in property prices being the long-term gain, while ongoing rental income is the short-term benefit. From both angles, investment in sustainable buildings can pay dividends for investors. 

It is unlikely that this new approach to social investing is a fashion that will eventually fade and be replaced by a new ‘fad’, since the millennial approach to impact investing is growing stronger and will undoubtedly be passed onto the next generation. 

Based on the generational shift across the asset management industry and the positive forecast for returns on impact investments, it seems improbable that the drive towards socially-responsible investing will slow down any time soon. In such circumstances, real estate will continue to provide a real opportunity. 

Editor's note: There are some parallels here, it seems, with arguments about the case for what is known as "impact investing". To view an article on that topic, see here.