Blueprints for an ethical approach

ESG credentials are now an integral part of any effective commercial real estate debt strategy, explains Richard Hamilton-Grey, sustainability manager of TH Real Estate.

The past decade has seen a significant shift towards the mainstreaming of ESG (environmental, social and governance) issues into investment decision making. Milestones such as the global ratification of the Paris accord; the widespread take up of the UN Principles for Responsible Investment; the integration of the UN Sustainable Development Goals; and recommendations from Taskforce for Climate Related Financial Disclosure, have all played a key part in embedding sustainable thinking into global investment activity.
The CRE finance sector is now undergoing a dramatic market transformation in attitudes towards ESG. Leading lenders are now driving new product and borrower engagement practices that move beyond risk management through to a dedicated focus on activating ESG alpha across their loan book.

TH Real Estate is focused on future-proofing today’s investments and identifying the optimum investments for tomorrow. A key ingredient for success is a commitment to working with the bigger picture trends and insights that will impact the future use and demand for global CRE. Given that real estate accounts for one-third of global carbon emissions (UN figures) and given the significant role that lenders play in facilitating real estate investment, TH Real Estate sees the debt market as playing a vital role in continuing to drive market transformation.

ESG performance transparency, benchmarking and industry collaboration are essential for driving real market transformation. In 2014, TH Real Estate became a member of the Global Real Estate Sustainability Benchmark – an industry-led ESG evaluation tool for the real estate market. The debt version of the GRESB benchmark is designed specifically for real estate lenders which helps identify global best practices in loan origination, due diligence underwriting and portfolio monitoring to advance risk management processes and inform product innovation.

“A key ingredient for success, is a commitment to working with the bigger picture trends and insights that will impact the future use and demand for global CRE”

Through our membership on the GRESB Debt Advisory Board, we have been collaborating with banks, pension funds, insurance companies, mortgage REITs and private equity debt funds, to develop the benchmark and drive more sustainable behaviour across the market. In 2016, we hosted a joint innovation-showcasing and knowledge-sharing event organised in partnership with GRESB, the Commercial Real Estate Finance Council, and the Better Buildings Partnership (the latter of which TH Real Estate is also an active member).
Our UK Debt strategy has participated in the GRESB benchmark since 2015 – being an early-stage participant in the debt aspect of the benchmark.

At TH Real Estate, we use a combination of borrower information, third party surveyors and internal processes, including a sustainability assessment of the borrower and the assets and leases, to develop a comprehensive risk profile for debt transactions. Where material sustainability risks are identified, our investment committee will ask the investment teams to carry out further investigations. This results in either engagement with the borrower to mitigate those risks appropriately or rejecting the transaction if a solution cannot be agreed. Our global head of sustainability participates in any fund strategy reviews to ensure that sustainable risks are managed effectively and consistently across our global platform.

We are excited about the progress and innovative approaches across the market to further integrate sustainability into CRE Debt. We have seen deepened borrower engagement from market players such as ING Bank and ABN AMRO who have used innovative technology such as an engagement tool to help their borrowers identify energy improvement measures that will provide both a financial return and improved environmental performance. It allows the borrower to access an online portal and see sustainable investment opportunities at a building or portfolio level.

Some lenders, such as Lloyds Bank, have also begun to offer green loans based on the sustainability performance of the Borrowers’ assets and sustainability strategies of their businesses. In the US, Fanny Mae and Freddie Mac, have also developed a range of green lending products to reward greener homes or incentivise energy refurbishments and retrofits.