International Finance
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Why is ESG vital to real estate?

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Luxembourg is conducive for fund managers to integrate ESG into real estate practices

It is no secret that fund managers are aware of the need to integrate ESG factors into their portfolios, with an up and coming generation of tech-savvy, sustainability conscious Gen Z individuals. It is in fact essential for fund managers to adapt to meet the rising demands of current and future clients to stay ahead of the industry curve.

ESG is important 

But ESG is not just the latest buzzword on the financial services block. It is the key to unlocking liquidity in the real estate game. Certainly, the desire to invest in property aligned with ESG principles is nothing new. But with a seismic shift towards ESG investing over the last 5 years, a recent thought-provoking panel discussion at the ALFI PE/RE conference last November got me thinking: what does this mean for investors with existing property built without ESG considerations? And what role does technology have to play here? The truth is that many real estate assets are at risk of being stranded and investors developing stores of trapped cash if fund managers don’t integrate ESG factors into their real estate portfolios.

To prevent an accumulation of frozen assets, fund managers need to identify ways to truly integrate ESG principles into their real estate portfolio without greenwashing and communicate this effectively to the investor.

Luxembourg presents a better climate for fund managers 

In this context, Luxembourg presents a better climate for fund managers to do so. By creating a range of labels attributed to different sustainability factors such as climate finance, microfinance, environment, green bond and ESG initiatives like the LuxFLAG clearly define ESG eligibility criteria, creating an environment in which fund managers can take considered steps towards more sustainable financing. Furthermore, a consistent approach to ESG measurement across the jurisdiction ultimately allows fund managers to compare the ESG contribution of their real estate assets against an industry recognised benchmark. In time, this process not only allows fund managers to better integrate ESG principles into their portfolio but also raise the capital of those sustainable investments and generate better returns for clients.

To the latter point, what cannot be understated about the dawning risk of stranded real estate assets is the role that service providers can play in monitoring and mitigating that risk. While labels clearly define ESG factors for fund managers to adhere to, without the ability to measure the performance of those assets and relay that information back to the investor, the value of ESG considerations are lost in communication.

This is where technology and data play vital roles. It is essential that asset servicers enable fund managers to demonstrate value add in line with what the investor values most. We are seeing the benefits of robotics process automation (RPA) in releasing asset managers’ most important resources from high-volume, repetitive roles to do more demanding and valuable work. Now asset servicers will need to go further by using technology to gather and aggregate ESG performance data and transform this into smart, measurable information through an easily accessible dashboard from which fund managers and investors can view portfolio performance in real-time to provide a clear-value-add and continue to shape the future of the real estate industry.

While disruptive technology is essential to keeping the industry looking forward and can increase efficiency in the long-term, many firms are at the risk of trying to run before they can walk.The situation leaves them stuck in a tangled web of legacy technology architecture, only to exacerbate the problem by stacking new technology solutions on top of legacy plumbing rather than looking at how to integrate the right technology into existing back office processes. This is where RPA steps in and is truly helping fund managers to streamline back office processes, reducing costs, operational risk and ultimately enabling them to spend more time on what matters most: growing their business and adding value to their clients.

Notably, 2020 has seen remote work become a requirement rather than an option in most parts of the world due to the coronavirus pandemic. As a result, the funds industry has been now more dependent than ever on technology to ensure investor needs are being met as the sector adapts to new methods of working.

According to UiPath, nearly 50 percent of organisations will be increasing their spending on RPA in 2021. As businesses look toward automation to tackle market pressures that have mounted as a result of the pandemic, we can expect the real estate sector will be no different. And while Covid-19 vaccine news appears to put an end in sight for the pandemic, we expect further technological innovation across the industry, enabling asset servicers to continue adding value.

In 2021 and beyond, asset servicers will need to go further by using technology to gather and aggregate ESG performance data and transform this into smart, measurable information—via an easily accessible dashboard from which fund managers and investors can view portfolio performance in real-time—to provide a clear-value-add and continue to shape the future of the real estate industry.

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