Why Should You Invest in an ESG Real Estate Fund?
ESG has become an essential component of real estate funds’ strategies. 87% of the funds surveyed have an ESG strategy, up from 81% in 2022, and 81% have associated goals (68% in 2022). But is this a guarantee of quality?
ASPIM and OID have published the 2023 edition of their study highlighting key trends in ESG and SRI practices among real estate funds. The study is based on an analysis of the ESG policies of 120 real estate funds in light of new European and French regulations. The study confirms that ESG has become an essential component of real estate funds’ strategies: 87% of the funds studied have an ESG strategy, up from 81% in 2022, and 81% have associated targets (68% in 2022).
Article 29 of the Energy and Climate Act
Article 29 of the French Energy and Climate Act imposes non-financial reporting requirements—particularly regarding climate alignment and biodiversity—on funds and entities with total assets under management exceeding 500 million euros. It encourages stakeholders to develop structured methodologies.
This contributes to a significantly broader and more in-depth consideration of climate and biodiversity issues. As a result, 72% of these entities are committed to reducing greenhouse gas emissions, an increase of 5 percentage points compared to last year. In addition, 78% of subject funds now use a biodiversity reporting indicator. Finally, 63% of funds now conduct physical risk assessments of their portfolios, an increase of more than 10 percentage points compared to the previous year.
The Sustainable Finance Disclosure Regulation (SFDR)
This Regulation establishes common rules for non-financial reporting by financial market participants, including a classification of funds based on their sustainability strategies. The year 2023 marked the entry into force of quantitative reporting on the main adverse impacts for Article 8 and 9 products.
The proportion of funds that do not report a classification has decreased significantly since 2022: now, virtually all retail real estate funds surveyed report their SFDR classification. The share by value of funds classified as hybrid Article 8 funds has risen sharply. Indeed, these funds are widely favored, currently accounting for 39% of funds (by value). The share of funds classified as Article 9 with a sustainable investment objective has remained relatively stable. It accounts for 25% of the funds by value. In total, two-thirds of the assets under management associated with retail real estate funds now pursue a sustainable investment objective, either partially or across their entire portfolio.
The European Taxonomy
The European Taxonomy is the European framework used to classify an economic activity as “sustainable” from an environmental perspective.
Today, 58% of funds classified as Article 8 and Article 8 hybrid funds report a taxonomy commitment, as do 100% of funds classified as Article 9 funds. Beyond these commitments, the actual alignment percentages reported in average annual reports remain fairly low: an average of 2% actual alignment in terms of market value, 5% in terms of revenue, and 2% in terms of CAPEX (capital expenditures).
Regarding the SRI Real Estate Label
The SRI Real Estate Label has become essential for real estate funds. Today, 64 retail funds hold the SRI label, representing 58% of the market. This label helps highlight funds committed to an ESG approach.
The analysis framework, composed of ESG criteria, now includes an average of 45 indicators. The weightings for the three areas—Environmental, Social, and Governance—remain stable, with environmental indicators carrying a higher weight of 44%, as required by the label’s guidelines. 91% of the funds follow a “Best-in-Progress” strategy, an approach that allows managers to highlight improvements in the ESG performance of their assets. Finally, 77% of funds publish their stakeholder engagement policy, an increase of 12 percentage points compared to 2022.
