PitchBook News - What ESG means for real estate

With more investors looking to real estate as a potential inflation hedge, and with private markets having developed a taste for sustainable investing, we bring you our latest analyst note: ESG and Impact Investing in Private Market Real Estate.

This report is a guide for GPs, LPs, consultants and others on the ESG-related risks and sustainable investing opportunities that exist in the space across investment strategies and property sectors. It delves into the interplay between risk exposure and geography, tenant profile, and implementation of capital improvements, among other factors, answering the question of how to address ESG gaps and capitalize on opportunities.

The strategies that involve the fewest meaningful changes to properties are those that typically experience the least risk and opportunity, while those that require the most substantive changes to meet return targets experience the greatest degree of both. For example, as core strategies employ a buy-and-hold approach with the highest-quality assets in the best locations, they frequently already benefit from built-in “healthy building” and energy- and water-conscious features. Similarly, as core funds acquire established buildings without the intent to reposition them, they aren’t as vulnerable as other strategies are to business ethics risks due to permitting-related government touchpoints.

In contrast, an opportunistic strategy’s new development faces all the sustainable investing risks and potential that come with building from the ground up. Investors can reap the benefits of using responsibly sourced materials to create a climate-resilient property or bear the repercussions of negligently disrupting a delicate ecosystem. They can garner buy-in from the surrounding community by building rapport with local leaders or suffer reputational damages and construction delays due to onsite injuries.

For more on how property subsectors such as multifamily residential, hospitality & recreation, manufacturing, and agricultural land fit into the equation, read the full note.