Our Head of Investment Management, Phil Walker, sat down with Head of Asset Management Doug Burton-Cantley, and Sahil Chandaria, Investment and Asset Management Analyst, to discuss the ESG agenda and what it means for Avignon Capital.

“Hi Doug, Sahil, thanks for sitting down with me. Would you mind telling our readers about Avignon’s approach to the ESG agenda?”

Doug: Hi Phil, great to speak with you about this. As you know ESG has been a key pillar of influence at Avignon for quite some time, with respect to both the management of our portfolio and the corporate business itself. Like some other businesses we have been somewhat sporadic in our approach but it’s not until recently that we’ve converted that into a more coordinated and clearly defined business platform. We’ve created an ESG taskforce which will roll out our “Brown to Green” strategies, with an exclusive value-add focus on transforming under-managed, under-invested and outdated buildings into those with exemplary ESG credentials.

Sahil: We believe we can offer real value to our investors. The roll out will begin in Germany before moving into our other areas of operation including the Netherlands, U.K, Germany, Spain and Portugal. We’ll generally be targeting assets well positioned to achieve our ESG targets without aggressive building and construction works being required to minimise our Carbon footprint. We are currently looking at quality buildings which are somewhat dated.

“Thank you both. I know the real estate industry has been making a real effort on environmental matters. How does it go about satisfying the S (Social) and the G (Governance) too?”

Doug: I’d say it has actually been quite progressive on the Governance side. Diversity is at the top of the agenda for almost every operator and there’s a lot to be said about the growing checks and balances in place to uphold the strictest standards of conduct – Anti-Money Laundering and Know Your Client procedures, for example.

The S is a little more nuanced as it’s quite tricky to measure social impact, and the opportunity to implement it can be highly situational. A single let industrial unit isn’t going to offer the same opportunities perhaps as a multi-use campus where cafes, community facilities, gyms and local employment opportunities are easier to identify and deliver. That’s not to say that single let buildings cannot achieve significant impact, it just needs more out the box thinking and often a lot more tenant coordination.

Sahil: It’s all about benchmarking, really. It would be fair to say that the industry’s social impact assessment methods aren’t quite as polished as they are for environmental considerations. We expect that to be at the forefront of industry conversations over the next few years.

“I couldn’t agree more. Are you able to give our readers some examples of our ESG credentials across our portfolio?”

Doug: An office asset on Miguel Bombarda, Lisbon, is a great example of a highly-environmentally-friendly building. We acquired the asset in 2019 with the intention of using it as our first project into the Portuguese market. We’ve invested heavily in the refurb and installation of energy-efficient systems, and the bulk of the data from those systems is available for tenants to view through the “hello energy” platform. Although construction is not yet complete we have increased the energy certification to A from C and are targeting a BREEAM in use certification of excellent. We focused on local employment and the sourcing of local materials from office furniture to local art work.

We were also able to achieve our goals on two of our office buildings in Berlin and Bristol on the social impact front. In conjunction with our investors we made the occupancy of some area’s designated to impact focused operators.

Sahil: We’re also very careful when trying to structure leasing deals with our tenants and that they’ll be underpinned by ESG credentials. Restaurant operators in the Berlin commercial space were required to follow sustainability conditions and vertical farming structures, for example. Restaurant operators in the Berlin commercial space were required to follow sustainability conditions and vertical farming structures, for example.

“That sounds interesting. The concept of ‘greenwashing’ appears to be discussed far more than it should be in the real estate industry. With that in mind, is there a danger that businesses could be adopting the ESG agenda for PR purposes?”

Sahil: I think it’s a very small minority adopting that line of thinking. The ESG agenda has moved way beyond a marketing tool and it’s rapidly getting to a point of financial necessity. Developers, occupiers, landlords and investors are recognising that a strong illustration of ESG credentials is financially sensible in many respects.

“What do you mean by that?”

Doug: We are seeking to work with investors to embrace and invest in ESG as we strongly feel that the financial advantages are already flowing through alongside the potential penalties of no action. There’s an increasing volume of data which points to the correlation between rental values and BREEAM ratings, as tenants rightly demand the best quality. Aligned to this we will hopefully see the cost of finance and capital fall when linked to ESG criteria. There of course remains the cloud of taxation, increasing insurance costs and potential reduction in target market in terms of occupier and investors if the current momentum within the real estate industry slows.

“And how has the pandemic affected all of this?”

Sahil: It’s been really positive. I think it’s made people stop and think and that’s especially important for the real estate industry. There is a real onus on us to be pioneers in the ESG space considering we account for around 40% of global greenhouse gas emissions annually.

We’ve also been forced to re-evaluate the way we work and its impact on our wellbeing, making us far more demanding of what we expect from the workplace and our employer. That can only be a good thing.

“That’s good to hear. And what’s next for the ESG agenda?”

Doug: Benchmarking will continue to be a defining feature for many years to come, particularly on the social impact front. There are impressive models already developed across the world and it feels like countries seem to be learning off one another, fine tuning their own versions – for example, Germany’s GRESB model, where the real value lies in its ability to monitor credentials on an ongoing basis. I’d imagine various accreditations will morph into smaller, unified ones, but I don’t foresee a global standard being introduced any time soon. That’s not such a bad thing as I’m not sure it’s wholly necessary.

Sahil: The importance of data will continue to be an area of significant focus. The ability to track the progress of the ESG benefits and ensure it is being properly implemented is intrinsic to its success. That’s why we’re seeing the likes of Blackrock and other major players acquire data companies at a rapid pace. There’s no doubt that the proptech industry is going to be a key beneficiary for years to come as they can offer real and essential value.

“Doug, Sahil, it’s been really interesting talking to you and thanks a lot for your time.”

To hear more about our investment strategies and approach to ESG, please contact us – investment@avignoncapital.com