More and more, environmental, social and governance (ESG) investing is permeating various sectors. One area of focus is real estate and funds focusing on this tangible asset will start to see more ESG criteria entering the fold.
While investing to earn a profit will always be at the forefront in real estate investing, ESG will now play an integral role in investment decisions.
“Whereas previously ethical investment may have been viewed as morally virtuous, it is now also being seen as a financially sound investment in its own right, as well as one that promotes values and ideals that form the basis of many firms. The COVID-19 pandemic has accelerated the elevation of the importance of ESG performance,” wrote Jonathan Cantor in the article “Dentons Asset Management and Investment Funds: ESG Performance in Real Estate Investment Funds.”
As mentioned, Covid-19 has been an outperformer during the Covid-19 pandemic, outpacing even broad market indexes like the S&P 500. As the space continues to catch fire, it will change the mindset of real estate investors.
Cantor mentioned that “Investors in real estate will look at the role played by the property they indirectly own – is their investment having a positive impact on the community and the wider environment?”
As such, real estate fund managers will have to adapt to this ESG-seeking initiative.
“Fund managers in the real estate sector need to recognise investor demand for transparency and clarity in reporting ESG performance of funds and their investments,” Cantor wrote. “The onus is on managers to engage with investors and find the right disclosure model for their needs. Continued reporting and disclosure will help deliver a sustainable future, whilst benefiting a manager’s own business through having an empowered and proud workforce, delivering financially successful products.”
ETF Options to Combine Real Estate and ESG
If investors want to home in on real estate itself, it might serve them well to check out the Vanguard Real Estate ETF (NYSEArca: VNQ). VNQ seeks to provide a high level of income and moderate long-term capital appreciation by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index that measures the performance of publicly traded equity REITs and other real estate-related investments.
Investors who want ESG exposure via an ETF wrapper can take look at the FlexShares STOXX US ESG Impact Index Fund (BATS: ESG). The fund seeks investment results that correspond generally to the price and yield performance, before fees and expenses, of the STOXX® USA ESG Impact Index.
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