Sustainable development is luring investors across the globe

By Lynn Novelli

Sustainable development is a global initiative that is rapidly gaining momentum. No longer just a buzzword, "going green" is becoming a business requirement as investors and customers look beyond profitability and demand greater corporate environmental and social accountability.

TAKE AWAY There are $2 trillion to $3 trillion in assets currently under management in socially responsible funds, with investors seeking information on sustainable companies. There are indexes, such as the Global Reporting Initiative and the Dow Jones Sustainability Index, which are dedicated to help investors find sustainable companies as well as help companies meet sustainable goals. On the GRI registry of reporting companies, 233 are U.S. companies and more than 1,960 are non-U.S. companies.

"With $2.3 trillion in assets currently under management in socially responsible funds, investors are seeking information," says Bruce Kahn, vice president for wealth management with Citigroup Smith Barney. "Some REITs are missing opportunities to tap into this growing capital source."

Jeannie Leonard, vice president, investor relations and corporate communications at Liberty Property Trust (NYSE: LRY), says she has seen a surge of investor interest in the company's sustainable development projects. "We constantly receive inquiries from the media and shareholders regarding our green activities. People are interested in investing in companies they can feel good about and can deliver the return that they expect."

Sustainable Investing

This year marks the eighth anniversary of the Dow Jones Global Sustainability Indexes. The first sustainable index to be created, the Dow Jones Sustainability World Index (DJSI World), includes the top 10 percent of the largest 2,500 companies around the world in terms of sustainability. It was the brainchild of Sustainable Asset Management (SAM), a Zurich-based independent asset management company specializing in sustainability investments since 1995.

"We are focused on sustainability investing because sustainability pays," says Alexander Barkawi, managing director, SAM Indexes. "After several years of doing business, we realized that there would have to have a professional benchmark in order to move sustainability into mainstream investing."

SAM approached Dow Jones, and the two entities collaborated to create the Sustainability World Index, with SAM providing the necessary research support. Companies were selected for the index based on a corporate suitability assessment that identified sustainability leaders in each of 58 industry groups. Corporations responded to a questionnaire that inquired about their activities in areas such as climate change strategies, energy consumption, human resources development, knowledge management, stakeholder relations and corporate governance.

In response to investor demand, SAM now licenses the indexes to asset managers worldwide who use them to create sustainability-based investment products and manage portfolios directly linked to the indexes. "There is a very positive response and a growing demand among the financial community," Barkawi says. "On the corporate side, we see a growing number of companies defining inclusion in the sustainability index as a corporate goal. In some companies, bonus payments to selected employees are made based on whether they get in."

Worldwide, SAM-licensed fund managers now have more than $5.5 billion under management in sustainability funds. Institutional investors are one of the main drivers, Barkawi says. "Rather than jumping from one quarterly report to the next, they are taking a more responsible view by considering the long-term impact of companies or businesses."

Investor Interest

Private equity investors also are a significant force in bringing sustainability investing to the forefront, according to Clark McKinley, a spokesperson for the California Public Employees' Retirement System (CalPERS). The fund manages a portfolio of more than $230 billion for 1.5 million members.

"Private equity investors are hunting for small companies that demonstrate sustainability," McKinley says. "It's not a fad. There is a major realization that companies cannot degrade natural resources without impacting their investment return."

For real estate investment, the interest is in energy reduction and other conservation measures, he says. CalPERS portfolio managers seek companies with an interest in alternative energy for investment. "We have a big commitment to this because it is the wave of the future," McKinley says.

Many institutional investors like General Motors Asset Management (GMAM) are still evaluating the viability of sustainability investing. GMAM manages 30 pension plans from General Motors and other major corporations and includes a number of REITs in its real estate portfolio.

Jamie Behar, managing director, real estate and alternative investments for GMAM says that the company is evaluating a sustainability investment program with the goal of maximizing returns. Of interest to REITs, GMAM's real estate unit has engaged a green wave consultant and is in the preliminary stages of identifying specific goals.

Despite the heightened interest in sustainability investing, it is still "far from the mainstream," according to Jerome de Bontin, president and CEO, Sustainability Investments, LLC. The company runs a number of large, European-based green funds.

De Bontin estimates that $1 of every $10 invested currently goes to a socially responsible fund, but believes this will change as companies respond to pressures to be more environmentally responsible. "Companies are trying to become greener," he says. "An important trend is to improve their environmental image for shareholders."

Sustainability reporting translates to dollars and cents among private and institutional investors who see companies that are green as having better corporate values, Kahn says. "In making an investment choice, they weigh the risk of the business versus how it fits their own values."

In Kahn's experience and research, energy efficiency tends to carry the greatest weight with investors in assessing a REIT's level of environmental responsibility. Investors also are interested in Leadership in Energy and Environmental Design (LEED) certification, sustainable urban development and broader sustainability issues such as community development.

Meeting Green Goals

The Global Reporting Initiative (GRI), a non-profit, international organization sponsored by the United Nations Environmental Programme, is dedicated to helping companies meet investors' expectations for socially conscious investing. Since 2000 GRI has published international guidelines for sustainable development reporting.

According to GRI, the guidelines are for use by organizations for voluntary reporting on the economic, environmental and social impact of their activities, products and services. GRI's 80 guidelines set the standard for corporate/organizational performance in areas such as environmental impact, labor practices, human rights and product responsibility.

A company that elects to participate in GRI reporting evaluates its performance against the guidelines to create a sustainability report. An organization can choose to report at GRI application Level A, B or C, with A being the most stringent.

Since the first standards were written, the committee has created specialized subsets of standards for certain industries. Standards specific to the real estate industry are currently in the works.

GRI's expectation is that sustainability reporting eventually will become as much a part of corporate culture as the annual financial report. To date, more than 2,200 organizations worldwide have adopted GRI reporting.

GRI reporting in the United States is still in its earliest stages, Kahn says. Fund managers are using the various Dow Jones Sustainability Indexes, rather than the GRI guidelines to gauge corporate commitment to environmental responsibility and sustainable development, but this is evolving, he says.

Kahn believes that demands from investors—particularly large institutional ones—for disclosure about company environmental policies will be the motivation behind corporate sustainability reporting. "There is pressure to report, so more companies are doing it," Kahn says. "GRI reporting is providing a new lens for evaluating companies."

REITs on Board

In April 2006, ProLogis (NYSE: PLD), the world's largest owner, manager and developer of distribution facilities, became the first U.S. real estate company to issue a sustainability report in accordance with GRI standards. The company has made a public statement that it is committed to becoming the global leader in sustainable warehouse design and construction.

With a large international platform—$2.2 billion in new distribution centers last year alone in markets across Asia, Europe and North America—ProLogis is uniquely positioned to participate in the GRI guidelines, says Melissa Marsden, the company's vice president of investor relations.

Although ProLogis is the only REIT currently participating in formal GRI reporting, it is likely that more companies will take this step in the not-too-distant future, according to Progressive Investor newsletter, a publication that gives investors information on sustainable companies across several industries worldwide. The newsletter also says that more than 40 percent of the more than 200 U.S. REITs already are pursuing energy efficiency and green building upgrades and another 27 percent plan to do so.

Liberty Property Trust is among those that have made a commitment to sustainable development but has not adopted the GRI reporting guidelines as of yet. "The green building movement is just starting to grapple with the issues of reporting and documentation. We're in the process of figuring out how to communicate it," Leonard says. Instead, the REIT is focusing its efforts on constructing buildings that meet LEED standards.

Liberty Property Trust does discuss its green capabilities in its annual report and 10-K, but "full reporting is further down the road for us," Leonard says. For now, the company is directing its sustainability efforts toward LEED standards, where it finds the most value.

An International Initiative

Out of the more than 2,200 companies in the GRI registry of reporting companies, just 233 are American. North America in general and the United States in particular clearly are lagging behind the curve in sustainable development reporting.

One of the reasons for the delay may be that U.S. businesses are not convinced of the need, Marsden says. "U.S.-based businesses do not have to adopt GRI standards to obtain land or permits," she says. "GRI reporting is not being demanded by their customers so there is little motivation."

Global customers with interests both in and outside the United States will be another impetus for change, Marsden predicts. "In our case, customers know what we are doing in sustainable development in other countries and want us to do the same for them in the United States," she says. "As customer demand for sustainable development and accountability increases in the United States, the same pull-through for reporting will occur."

Fraser Hughes, research director for the European Public Real Estate Association (EPRA) reports a growing interest in sustainability in Europe. "If we don't do something about environmental issues immediately, we'll pay for it in the future," he says.

The most notable interest among European countries is coming from the U.K., where companies such as Land Securities Group PLC (LSE: Land.L), The British Land Company PLC (LSE BLND.L) and Workspace Group PLC (LSE: WKP.L) are well known for their commitment to sustainable investment, he says. "In addition, a number of institutional investors are active in this area."

In Asia, awareness of GRI reporting is increasing, according to Peter Mitchell, CEO of the Asian Public Real Estate Association (APREA). "Developments that have occurred to date have been driven at the project or private sector level and not by government," he says.

Similar to what is happening in the United States, interest in GRI reporting in Asia parallels a heightened environmental awareness, Mitchell says. "This may be the result of China's significant environmental problems as well as quality of life issues that are starting to emerge in Hong Kong," he says.

The GRI guidelines currently are an agenda item for APREA's best practices committee. "Sustainable development and investment will become more of a major issue in Asia in the near future," Mitchell says. "A lot of work on green buildings and sustainable investment has been done in Australia, and we will be capitalizing on that in our best practice initiatives."

The Property Council of Australia (PCA) is also in the process of developing sustainability reporting standards for real estate and construction based on the GRI. Trevor Cooke, PCA's executive director of capital markets, anticipates that a working group will convene before the end of the year, with final content approved in 2008. The creation of reporting guidelines follows the council's commitment to environmental performance initiated five years ago. "Everything built in Australia is competing for environmental ratings," Cooke says. "The PCA has been highly successful in making the case for green dividends by proving the returns attainable from environmentally conscious development and tenant uptake."

Consequently, demand for green buildings by corporate tenants is strong in Australia. The construction and development industry has taken the lead voluntarily in environmentally responsible building, complying with standards established by the council. Creating a common platform for environmental reporting is the next logical step, Cooke says.

Worldwide, sustainability investing and reporting are still in their infancy. Radical change is afoot, however, as investors seek companies that mesh with their personal, moral and ethical values and developers discover the bottom-line advantages of sustainable development, Kahn says. "Assessing REITs by their level of environmental responsibility will become the new norm."