Real estate

We are pleased to report that 86% of the real estate portfolio is allocated to funds that are acting to avoid harm to the environment and society. A further 7% is allocated to funds that are benefitting stakeholders. We are also pleased to report that the allocation to funds that may/do cause harm has reduced from 17% in 2022 to 7% in 2023. This reflects the rotation away from legacy assets that do not align with our ESG and RI approach, with our focus now on ensuring that existing managers continue to maintain strong ESG performance, manage risks, capitalise on sustainability opportunities and future proof the portfolio. See Figure 16.

With the high-interest rate environment of 2023, it was a challenging financial year for the real estate sector globally. We noted a bifurcation within the investment universe were ESG leaders continued to execute on their ambitious strategies, supported by strong teams, resources, and reporting. Smaller managers with less mature ESG teams and strategies, however, pared back their ESG efforts, narrowing their focus to the most financially material ESG issues. Pleasingly, Anthos’ Real Estate Portfolio has maintained its strong ESG performance and commitment to continuous improvement at the fund and asset-level.

This year, with real estate managers facing a number of macroeconomic headwinds, the focus on the financial materiality of ESG issues was paramount. Our managers integrate material ESG issues into investment analysis and decision-making processes, formally evaluating risks and opportunities with integration into management decision-making. ESG-factors can lead to value erosion in a number of ways, as shown in Figure 17.

For real estate investments, financially material ESG issues include energy management, water and waste management, physical impacts of climate change, biodiversity and labour practices through the supply chain. Through our ESG assessments and engagements in 2023, we focused on ensuring that these issues were addressed by our managers. Anthos has been an investor of GRESB (formerly the Global Real Estate Sustainability Benchmark) and we use GRESB’s portfolio assessment and carbon emissions data tools support to support our ESG integration activities by providing more transparent and comparable data across funds, helping us to identify areas of opportunity and risk in our portfolio.

The Anthos real estate portfolios scored above the GRESB and Peer Average on the GRESB benchmark, which assesses performance on material ESG components such as governance, management, GHG emissions, energy, water, waste, tenants and community. While all portfolios scored ‘Green Star’ recognition, a metric of strong absolute performance, there was wide dispersion in GRESB scores, particularly in relation to emissions intensity. For funds that scored particularly well on an ESG issue, we engaged to establish a benchmark of best practice, and then actively monitored and engaged with funds where they were lagging on material issues to co-develop a roadmap to improve performance. This ensures that the portfolio maintains strong ESG performance in line with market, regulatory and stakeholder expectations, and future proofs the portfolio against climate transition risks and stranding of assets.

An example of a fund in the portfolio that benefits stakeholders is a Dutch residential fund that invests in high-quality, affordable, and sustainable homes, investing in line with responsible principles. It has a 5-star GRESB rating and detailed specific climaterelated KPIs to track progress towards energy-efficiency and emissions objectives. The fund also reports expected capex associated with ESG enhancements in a transparent and commercial manner. What’s more, the fund promotes environmental and social characteristics and is classified as an SFDR Article 8 fund. The fund supports four of the UN SDGs: Affordable and clean energy, Decent work and economic growth, Sustainable cities and communities, and Climate action.

Real Estate (directly and indirectly) is responsible for about 40% of all greenhouse gas (GHG) emissions globally (UNEP FI, 2022). As a result, the ambition to achieve net zero demands major changes to the sector and presents various transition risks, such as declining market attractiveness for unsustainable buildings, increasing regulation and disclosure requirements, future energy use intensity requirements, building retrofit requirements, as well as opportunities to capitalise on and future proof assets, deploy additional renewable energy and energy efficiency solutions to its customers. We recognise that climate risk (physical and transition risks) threaten real estate asset cashflows as well as the future value of the assets themselves. Climate change is therefore one of the portfolio’s most material financial risk and opportunity and, therefore, integration of climate-related issues into our investmentdecision making is critical to delivering sustainable, long-term returns. In 2024, we plan to further focus on our most material risk and opportunity, climate change and decarbonisation, as we roll out climate strategies for each of our funds, coupled with a focus on creating social value within the communities in which we invest and their associated supply chains.