Why the halo of responsible
investment is driving
institutional rigour

Today, when it comes to raising responsible investment standards, institutional rigour is a more likely driver of change than government legislation, writes Nick Clark, Partner, for Institutional Real Estate, Inc. (Europe). 

The past year has seen investors push for higher levels of institutional scrutiny across all sectors, particularly the private rented sector (PRS), industrial and logistics, and offices. This new analysis has led to many investors now re-assessing their legacy investments against their new and emerging standards.

The key for investors is to remain focused on their business case, and to ensure that every decision made by project managers aligns with it. For example, in a scenario where a developer is proposing to use a combustible material within a building, an experienced project manager should step in and question the wisdom of such a decision. Even though the material in question may be entirely compliant with building regulations, it may create risk for the investor by affecting liquidity further down the line. By stepping in, the project manager could be protecting an investor. Insurers can also take an unfavourable view of risk associated with certain building materials, and again, it is the role of the expert project manager to protect investors from exposure to this kind of risk.

Responsible investment can be taken a step further, especially with regard to ESG requirements.

For the vast majority of institutional investors, ESG factors play a central role when making long-term investment decisions and are seen as more important than traditional financial metrics, according to the inaugural Responsible Capitalism survey, conducted by Federated Hermes in 2021. For example, while it is not yet a requirement for warehouse frames to be designed to bear the weight of photovoltaic panels, responsible investors often choose to future-proof an asset in this manner regardless of whether it is not yet compelled under any current legislation.

With further heightening of institutional standards for legacy PRS coming down the line, investors’ benchmarks are likely to stay several steps ahead of government regulations.

A keen understanding of both investors’ and insurers’ requirements enables a joined-up approach that goes directly to the core of investment goals. ESG experts can also collaborate with investors to create net-zero asset plans, which future-proof entire portfolios.

It is also vital to look at the human factor — an area that is too often neglected by many building regulations.

Project managers must broaden their thinking to ensure amenity factors, such as indoor air quality, and sustainability factors, such as operational energy and embodied carbon, are included. Making sure that developments include the correct levels of flexibility of infrastructure and power supply, so that provision can be increased later, is a sure way to meet future demand.

A critical mass of investors are now aiming for net-zero carbon, far and away beyond today’s building regulations, but it is only to be expected that this will be mandatory for new developments in the future, so it must be incorporated now.

Indeed, there is little point designing and building assets that only meet today’s standards. By the time they are delivered, the world will have moved on. The trick is to predict what the market is going to expect in three-, four-, or five-years’ time, and future-proof assets so that they deliver true value to investors and occupiers.

The halo effect of responsible investment is front of mind for institutions, who see risk everywhere they look. Therefore, the push for a gold standard — future-proofed to allow assets to stay ahead of the curve for longer, while not expensively overreaching — is a winning scenario for investors and occupiers alike.

By Nick Clark, Partner