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ESG, Sector outlooks, Sustainability

ISA Focus: The value of green

September 11, 2023
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  • Brian Klinksiek, Julie Manning, Amanda Chiang and Tobias Lindqvist discuss investing in ‘green’ real estate.

    The transition to a lower-carbon built environment is reshaping the definition of quality real estate. We can point to numerous anecdotal examples of green building features driving higher rents and values, as well as better overall performance. However, showing this rigorously and quantitively is challenging.

    Various academics, real estate agencies and other researchers have attempted to measure the difference between assets that possess and those that lack green features. They use a range of datasets that vary widely and have enjoyed varying degrees of success in drawing clear, convincing findings from their analysis.

    So is there a green premium? Or a brown discount?

    Price, value and performance differentials between assets that possess and those that lack certain sustainable credentials are often called one of the other. In our view, the difference between the green premiums and brown discounts is a matter of perspective and can vary with time, as given attributes transition from novel, to highly valued, to standard.

    For simplicity’s sake, we think of them as a single concept that we call “the value of green.”

    Our approach for this report is to examine the existing work on the topic and identify the most helpful and relevant analyses. This sits alongside our monitoring of outcomes within our own portfolio, a few examples of which we highlight as case studies.

    We find that while the range of estimates are wide, and depend on a variety of methodological considerations, the studies consistently find a statistically significant financial impact of asset sustainability features on metrics such as achieved rent, capital value, leasing success and overall performance. We will continue to monitor the evolving evidence of these differentials, both in the broader literature and within our portfolios.

    So does “green” actually have value?

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