Insights for financial inclusion investors from the real estate sector

Insights for financial inclusion investors from the real estate sector

Since I began the Frankfurt School ESG & Impact Investing course[1] in March 2023, I have become interested in understanding how different actors in various sectors pursue their non-financial goals. Although financial inclusion was specifically created to address social concerns and as such is of great interest in terms of ESG & impact, I find it very insightful to look at what traditional sectors are doing for two reasons. 1) Closing the gap between where we stand and the Sustainable Development Goals (SDGs)[2] requires all actors to change their practices; 2) the practices adopted by well-established actors may be inspiring for financial inclusion.

During the course, students (in groups of 4 to 5) have to make a proposal for a new investment vehicle pursing non-financial goals. In my group, we decided to study the case of an SFDR Article 8 real estate fund aiming at generating profits and at significantly improving the environmental footprint of the buildings under management. Real estate sustainability practices draw a lot of attention given that buildings are responsible for almost 40% of energy-related global carbon emission in the world while energy demand will increase by 50% by 2050.[3] In addition, the real estate sector often relates its non-financial goals with many SDGs.[4] Here are some insights picked from side-research I made as well as a discussion with a former classmate now working for a real estate fund:

• Although financial return remains the primary target for real estate investors, the best-in-class funds set some non-financial objectives in their prospectus such as receiving eco-labels on a large share of their assets (e.g. the HQE certification in France, DGNB label in Germany, LEED in the US, and BREAAM in UK). Beyond certifications, real estate professionals may even monitor the reduction in carbon emissions using the CRREM tool in order to track their alignment with net zero targets.
• In these cases, financial return and environmental performance can be reconciled: investing in green buildings is good business as evidenced by faster sale and lower vacancy rates.[5] CBRE’s European analysis suggests that office buildings with sustainability certifications earn a 6% rental premium over their non-certified peers.[6]
• Real estate integrated models[7] allow strong engagement in each project. The funds under direct management have dedicated staff to manage the construction work and ensure that building contractors deliver buildings meeting pre-determined environmental targets.
• There is a strong case of sustainability assessments and certifications in the real estate sector but the latter remain largely insufficient in quantity when compared to the total number of new buildings and building in existence. In addition, these certifications do not sufficiently take into account whether housing projects address the needs of groups in vulnerable situations, which is as essential components of sustainability.[8]

What lessons could we draw for the financial inclusion sector? While in real estate, one top ESG risks is energy efficiency, I believe that for financial inclusion, offering financial services (including debt) to vulnerable populations, it is client protection. In order to tackle its environmental risks, regulated real estate funds have recourse to numerous certifications. In financial inclusion, the Client Protection Pathway is an SPTF+CERISE initiative that allows Financial Service Providers (FSPs) to commit to client protection, be transparent about it and reach excellent level of performance through client protection certifications. CERISE+SPTF launched the Client Protection Pathway in December 2021 (taking over the Smart Campaign launched in 2009) but so far, counts about 200 committed institutions while the sector includes thousands.[9] The initiatives to boost the uptake of the Client Protection Pathway, such as the Joint Statement (gathering investors, networks, and associations, calling on all financial service providers to implement the Client Protection Standards) have not proved powerful enough to create a sufficient buy-in of the Client Protection Pathway by FSPs. Social investors have met last June in Luxembourg to discuss this challenge and many have committed to follow guidelines to minimum actions on client protection. The success of this new commitment will depend on the capacity of investors to engage with their investees on this major topic. While there is no doubt that private equity investors could follow a strong engagement path, private debt investors still have to define strong engagement models, even more so as they represent 78% of private asset impact funds.[10]

This article was written by Edouard Sers, Head of Risk, Compliance and Impact at Fondation GCA – Grameen Crédit Agricole.

[1] The content of this article occasionally refers to Frankfurt School materials (2023). Certified Expert in ESG & Impact Investing. Unit 4: 2. Integrating ESG and Impact Management in the Investment Process.

[2] OECD (2022), Global Outlook on Financing for Sustainable Development 2023: No Sustainability Without Equity, OECD Publishing, Paris, https://doi.org/10.1787/fcbe6ce9-en.

[3] Sustainable Buildings for everyone, everywhere. World Green Building Council.

[4] This varies for each actor. For the World Green Building Council classified 6 SDGs as advanced goals for the sector (deemed as key goals for the built sector), 5 as progressive goals (substantial impact of the built sector) and the others as growth targets (on which the sector may contribute).

[5] IFC, 2019

[6] The Value of Sustainable Building Features, CBRE Research, May 2023.

[7] When the investment manager is also owner, operator and developer.

[8] Conclusions drawn from Building sustainability assessment and benchmarking, an introduction, UN Habitat, 2017.

[9] For example, the data platform ATLAS includes data on 4 411 FSPs in 146 countries.

[10] Private Asset Impact Fund report 2022, Tameo.