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The SRI, does it transform itself when it applies to new asset classes ?

Apply the SRI outside the traditional securities (equities and corporate debt), is it not such a good idea, especially within the times and/or an irrelevant hegemonic order ?

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The extension of the SRI approach to new asset classes is an indisputable fact. Most of the increase in SRI assets has come from money market funds in 2009. Simultaneously, the SRI is also associated to private equity, infrastructure funds and real estate. Beyond the well-know difficulties to transform this interests of principle actually, in terms of collection, some are wondering about the relevance of this generalization. Applying the SRI outside the traditional securities (equities and corporate debt), is it not such a good idea, especially within the times and/or an irrelevant hegemonic order ?

Two preliminary remarks

The first point lies in the fundamentally changing behavior of the SRI approach, both in its scope, its purpose and its requirements, translated especially in the selection process. Intuition, activism, economic rationality, efficiency methods are everywhere in the changing relationship over time.

The second is the finding of the thinness of the empirical evidence regarding the financial interest of the approach for traditional asset classes (considering bonds and time, their total absence). this gap makes illusory any attempt to promote quantitatively the SRI for classes newly-involved, where it will be more than ever about insight and conviction.

Real estate SRI: Why ?

Real estate is obviously concerned with social responsibility, both as an essential component of social life and major constituent of the Common Good. Its status as (very) long-term active is also an ideal subject of the sustainability / efficiency relationship that supports economically the CSR.

Some figures highlight these issues:

Real estate consumes 36% of the energy produced in the world.
The building industry rejects nearly half of industrial waste
60% of the world population will live in urban zones in 2030;
23 megacities already include nearly 10% of it
The housing stock is old (60% of the French real estate is older than 1970) and is renewed very slowly (less than 2%) per year.

With these data we see that the application of the SRI approach to real estate meets its three motivations:
Match the agent practices with the investors core values. Act for the benefit of the Common Good, particularly in its transgenerational component.
Implement business intelligence through the search for signs of future performance, in terms of anticipation of internalization of hidden cost and foresight in the cost-benefit trade-offs in the long term. In other words, the purely extra-financial approach is fading as the ESG criteria are integrated into the business model.

Real estate SRI : how ?

Applied to securities, SRI is, originally an additional method of stock picking, both applied at the end of a top-down approach that as a purely bottom-up. Over the years, especially due to the recent crisis, the search for sustainability has been extended to all stages of the top-down allocation, as a filter of the process strength.

The transposition of these principles to real estate reflects a dichotomy between on the one hand the quantifiable - that is measurable standards and results and that defines the "green building" - and on the other hand the unquantifiable - that is attention to stake-holders the behavior of construction companies; surface consumption; transports; insertion into the urban, economic, social, cultural sectors and also the sports; operating conditions; landlord-tenant relations, etc..

Thus, in the same way that in the securities, there are many more investors convinced about the interest of funds with environmental profile as those applying the global SRI; the SRI real estate will be much more attractive when it is limited to the EHQ approach than when it integrates other elements of sustainability / responsibility.

Real Estate SRI: For what results?

The dichotomy described above is found when trying to highlight the cost-benefit advantages of The SRI real estate investment.
Regarding the green-building and all that is about the quality of the building, the theoretical demonstration - and already partly proven empirically - is that the additional cost of construction will be overcompensated by improving future cash flows, because of the energy performance, the consecutive rise in rents, the decrease in vacancy, lower renovation costs and ultimately more favorable resale conditions, in a logic of gradual eviction of non-compliant buildings. Overall, the ex-post IRR is greatly improved, justifying the economic benefits of the building environmental performance and also its energy performance.
For all that is in contrast to other components of the CSR, the demonstration is the simple intuition and it will be difficult to underpin, with supporting evidence, before many years. the benefits in terms of the occupant well-being, health, absenteeism and higher productivity can be challenged as pure angelic. And how to valorize the natural effects of the occupant or the actions of social mix or economic integration ?


Why real estate investor should look at the overall SRI quality of assets hold ?
The first is that real estate is truly a long-term investment asset (we are talking about actual possession). If as just said, it is not possible to demonstrate the beneficial contribution of the qualitative elements selected, it is however clear that none of these criteria considered separately is bearing an overall substandard performance.
The second is that these criteria taken together, in contrary demonstrate a level of overall quality. we can then draw a parallel between the scope of this signal and the credit now granted (especially because of the crisis) to the corporate governance as an indicator of future performance

Jacques Ninet , January 2010

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