Georgie Nelson
Hello, I'm Georgie Nelson, I am head of ESG for abrdn's Real Estate Investments Business. You are listening to the abrdn Sustainability Inspires Podcast, discussing all things relating to sustainability and responsible investing. I am delighted to have with me as my guests Vivienne King and Andy Smith from The Good Economy, and today we will be discussing sustainability topics pertinent to the real estate investment sector with a particular focus on the social aspects.
Vivienne and Andy, welcome to the podcast.
Vivienne King
Thank you, Georgie, great to be here.
Andy Smith
Hi, thanks for having us.
Georgie Nelson
So, we're at the start of 2024 and I think it's fair to say that 2023 has been a challenging year with regards to sustainability progress, especially with global carbon emissions, extreme weather events and some backtracking from governments on net zero commitments. However, in my opinion, it's always best to start the year positively so in five words, what was your personal top sustainability moment of 2023?
Vivienne King
Okay, well, if I start on that Georgie, you talk about challenging. It's challenging to try and get this into five words, but my five words are attendance at social impact events. What I mean by that is there wasn't one moment there were a series of moments that were outstanding for me because of the increasing numbers of people attending events and asking intelligent questions and a real desire to understand what social impact is and how they can be incorporating the delivery of positive impact for people in places into business delivery. So those are my five words, and that's the explanation for it, Georgie. If I'm allowed an explanation.
Georgie Nelson
Thanks, Vivienne, that's great to hear and you Andy?
Andy Smith
Yeah, for me the five words are publishing the SRS version 2.0, which is five words ish depending on where you are, where you draw the line of words. Yeah, I mean, I'll say more, maybe a bit more about later. But basically, the sustainability reporting standard for social affordable housing is yeah, this common approach for reporting ESG performance, for housing associations. And so, yep, we've done a big relaunch this year for version two. So that was the real highlight of last year for us.
Georgie Nelson
Thanks, Andy. I look forward to hearing about that later. And so, Vivienne, you've had an illustrious career in real estate. Can you tell us a bit about how your career has evolved over the years, especially with regards to sustainability?
Vivienne King
So, I am a solicitor by training. I moved from a major international city practice into the Crown Estate back in the 1990s. If anyone can remember that time and I moved in as a lawyer, as you might expect, but I sort of moved up the chain, as it were, and at the executive committee there, you know, we started to have conversations about sustainability, partly because corporate social responsibility had been very much part of the DNA of the Crown Estate. We did things in a thoughtful way. And I suppose what I saw was that there was an increasing movement in this respect in real estate and an increasing sense of responsibility, which wasn't just ours, but was actually multiplying around us. And of course, we had a tremendous opportunity because of the nature of the portfolio. Not only is there a lot of contiguous ownerships, but it's got an incredible array of investment sectors. So, I sort of leant into sustainability at that point. I engaged with Cranfield Business School, the Doughty Centre there, because what I wanted to do was, I wanted to move sustainability from being a marketing tool to actually being an investment tool. So, this was something that we needed to integrate in the way we did business. And Cranfield were exactly the right organization to deal with. So, from there we were able to create our first sustainability strategy, and this involved all of the exec leadership taking responsibility for elements of that strategy. And so that really sort of drove it in and you really started to see us walking the talk. So, we were not only integrating this through our governance, but we were also shifting the culture. And that's a very important part of integrating sustainability. So that really was the sort of start of my involvement. From there, I ran a housing association in the West End, so I really felt like I was at the sort of coalface of social impact because that was that was our job. It was to create homes and communities for people who wanted to live in the West End in a respectful and community-led way. So that really brought me very close to what the reality was and in particular an understanding of the challenges of living in a densely urban environment. And there I went to Revo, which is the trade association for retail, leisure and hospitality, and I was CEO there during 2020. And of course, 2020 was a year of crisis globally. So again, we were all faced with the social consequences of COVID. And I was really keen that despite everything that was preoccupying us, we should pursue and publish a social impact framework for the retail sector that was in train, and it needed to be published. And 2020 was exactly the right time to be doing it. So, a very strong focus there. I'm still involved in Revo. I'm on the ESG committee there is an operating board member and of course, from there I've moved to The Good Economy. So, my experience really has been sort of through a time when sustainability was really very, very peripheral back in the 1990s to something that we're seeing now, which is becoming increasingly cool, which is really heartening to see.
Georgie Nelson
Thanks, Vivienne, and it's great to hear that you are at the Crown Estate, which is a known example as being a leader for sustainability and real estate. So, really interesting to follow your career. And Andy, could you tell us a little bit about The Good Economy and what you've been focusing on to date?
Andy Smith
Yeah, so we're a social impact advisory company, been around for almost nine years now, and I suppose we're a kind of multidisciplinary organization with the real ultimate focus of trying to make an economy that works for everyone. So, we think a lot about people, places and the planet, although we are sort of social focused, I guess the kind of focus of us is around the discipline of impact, measurement and management. So that often means holding capital to account or helping them think through how do they hold themselves to account possibly. So, we spend a lot of time thinking about what's the right impact measurement and management approach for various different strategies and organizations. Also, we think a lot about impact verification and yes, as well as impact strategy. Yes, a whole range of services in these spaces.
Georgie Nelson
Thanks, Andy, I think that leads us quite nicely into the next topic of discussion. And, you know, as both of you have said, we've seen a lot of change with regards to the importance and consideration of sustainability with real estate investments over the last 10, 20 years. And, you know, kind of on that impact topic as well, one of those topical questions is how to balance sustainable outcomes with financial performance. One of the ways at abrdn, we try to understand and apply sustainability in our investment products is by using that sustainable investment spectrum. So, how we apply this depends on the type of real estate assets we have and what the investor appetite is. So, just to explain what I mean a little bit, when we look at that sustainable investing spectrum at the start of the spectrum, on the left-hand side, you have what have been more than traditional real estate products, which are focused on managing environmental, social and governance risk, which are material to investment performance. But the principal focus is the financial performance and return targets. And as you sort of move to the right on that spectrum, the investment approach is adapted to not only focus on the risks but also the opportunities you think could contribute to good financial performance and have a positive environmental and social contribution. And as you move even further on the right, you then have products which partially or fully focus on achieving sustainable outcome all the way to that impact focus where you have products which are principally targeting an impact. So, our suite of real estate investment products spanned this spectrum based on our investment requirements. It would be interesting to hear how this is similar to how you perceive sustainable investment of The Good Economy and what your thoughts are on this.
Andy Smith
Yeah, we look at the spectrum of capital quite a lot that you've just described. I think it's a really helpful mental model, a really helpful tool. I think one other thing it is worth flagging is there's almost sort of another even at the far end of our right-hand side of that spectrum, it pushes into this idea of sort of philanthropy grant giving as well. And I think it's worth remembering that there on the spectrum as well, that there'll be organizations that will looking for quite comfortable submarket returns. Obviously, if you’re giving grants are expecting 0% return, right? So that's why there's this notion of a kind of a spectrum is helpful, not necessarily a shrewd investment decision if you're looking at 0% returns. But yeah, we definitely see it as the spectrum. Also, the other thing to say is some of these buckets have been more formalized recently by the SDR, the Sustainability Disclosure Requirements. This recently published by the FCA, provides kind of labels and definitions for kind of funds and strategies, certainly towards the sustainability and impact end of that spectrum. So, it's really helpful to have more than a clearer label associated with the spectrum of capital, which is a really useful model.
Georgie Nelson
And just to lead on from that, Vivienne, how do you think we can make a good business case for impactful investment for real estate investors?
Vivienne King
Yeah, well, Andy has mentioned philanthropy and of course philanthropy has been very much part of the DNA of the real estate industry for as long as I've been aware of it. But I think we do need to, you know, distinguish philanthropy from impact investing, because impact investments are aiming for a financial return as well as a positive social and an environmental impact. So, there is a difference there. And for me, commercial real estate has an intimate relationship with people and place. That's where it is. And in many ways, the supply-demand, dynamic and local needs are very closely aligned. And I'm sure Andy will talk later about the sort of fundamentals of impact investing and what one of those fundamentals is to be meeting a local need. So, that's what we do. We do meet local need. Impact investing is essentially an extension of that supply-demand dynamic. And so, in building in places, because we are operating in places, we have the opportunity to improve places. And in the course of improving places, we have the potential to actually improve the asset. So, we will always have a positive or a negative impact because of the physical presence we have in a place. And what we need to be doing is ensuring that there is more of the positive from the negative, preferably none of the negative and all of the positive. And in this changing environment that I've been sort of talking about earlier, I think what we're seeing is that there is increasing expectation, there is increasing pressure on us to be investing in a way that is integrating impact increasingly. I think, you know, I mentioned COVID, and I think that has been a game changer in so many ways, and not least because of this extreme awareness that we had of those who are more vulnerable, experiencing this far more intensely than others. And what can we who are the owners and managers of private capital do to improve those experiences whilst at the same time delivering on our on our fiduciary duty? I think that awareness has been a big factor and should feature in the business case. I think maybe allied to that we are seeing longer time horizons for investments, seeing less short-termism and more longer investment horizons. I think there is demand coming through from investors potentially prompted by consumers. But certainly, in conversations I'm having with those who are managing on behalf of investors, investors are wanting to know, well, what are you doing to support people, society as well as managing our money? And then, you know, Andy's mentioned SDR, we do have a changing regulatory environment. All products wanting to use a label need to have a sustainability objective. So, you really need to get on this train. You don't want to be left behind because you are everyone else is going to be ahead of you.
Georgie Nelson
Indeed, and I suppose just sort of breaking that apart a little bit, it's about being able to measure the positive and negative if that's the case of impacts of your real estate investments, but also allowing us to create specific products focused on a particular outcome which we think society needs. And I think it's been historically that the real estate sector has focused on the environmental aspects because they're easier to measure. And there's been a lot of progress with energy and water efficiency reduction of carbon emissions and now a lot more even on the nature side with more great rooves, walls and spaces, etc. And I think the social side has been a bit harder to understand and to measure. So, it'd be good to understand. In your opinion, what opportunity does the commercial real estate sector have in delivering social impact, specifically? And can you also just expand and tell me a little bit more about the challenges and learnings you've had over your career in achieving better social impact from real estate?
Vivienne King
Well, there are the sort of more obvious opportunities that come through from housing and Andy will talk about that. I'm very aware of it from having run a housing association. So I won’t sort of dwell on that sector for me because of the relationship that the built environment has with society, every sector has an opportunity to create social, social impact and potential to create positive social impact. And so, no one is excluded from or excused from this. We know what negative social impact looks like. We know what the impact of displacement means for people. Just as one example, we know that we can create environments that just don't work for people. So, what we need to be doing is not only focusing on the hard infrastructure but what implications that hard infrastructure has for the environment, for the environment around it. And so, I mean, town centre retail I think is a really good example. For retail, as we all know, which we've seen an increasing oversupply of retail and that's led to vacancies and vacancies lead to dereliction and then you've got socio-economic consequences which are bad for everybody. But you know, on the flip side of that, that presents an opportunity. Pricing is presenting an opportunity, repurposing is presenting an opportunity, really meeting the needs of the local environment, local community by putting something new, something different into the space, because the space is there. So, it needs so it needs to be filled. And yes, you know, outside London or the major cities, there will be lower growth. They recognize that, so viability is a challenge, but that doesn't mean it's not it's a challenge that can't be overcome. And you will have colleagues that will have views on this potentially seeing you know, lower volatility and potential income-led investments. And so, you also asked me about the challenge as well. Of course, have been many a part of the challenges have been cultural and part of them have been sort of technical. I mean, you know, people don't really understand what social impact is, partly because you can't conveniently put a number against it as you've been able to do with environmental performance. It's much I'm not saying environmental consequences is easy. By no means it is easy, but it is perhaps a little easier to understand because it is numeric and there's all sorts of different definitions of what social and social impact is and at The Good Economy, we have a view of what some of what social impact is. So, there is that and along with that there is a lack of standardization. So, the way you do it is different to the way I do it. So, how do you benchmark? How do you how do you how do you create something that people can understand and can measure their performance? At senior level, and this is this is rapidly changing but at senior level, there's been a lack of real sort of firm knowledge and understanding of this in order for it to be to be driven. And then you've also got this perceived sort of conflict of interests between financial duty or fiduciary duty, rather, and delivery of it. And the compromise that has to be made on returns. We don't share knowledge well in the industry, and I think this is an opportunity, if we want to create standardization or some level of standardization, if we shared the way we were taking our approaches to this, we could start to improve understanding. We could start to create a sort of level playing field. There's a massive fear and increasing fear of social washing. What can I claim reliably? So, should I claim anything? Because those who over-claim are being shown up is doing that. And I think one thing to mention which very practical, perhaps detail thing is, is part of the problem is fragmented ownerships. So, where you’re managing environmental performance of an asset of a single asset, you've got control of that entire asset. Well, apart from the fact that you’ve got occupiers in there who you need to influence. But other than that, you control that with social impact, unless you've got a significant ownership material ownership in a place, it's actually very difficult to influence the nature of that place. You can change the nature of the building and you can improve the experience of the people in the building, and you could perhaps make the facilities available more broadly. But it's actually quite difficult to have to have an impact with fragmented ownership. So those are the sorts of challenges that I've seen. But we're moving beyond them. We're not letting these challenges get in the way. One of the things that we've been doing is, you know, we've focusing very much on the inputs. How much time have we been spending; how much have we been investing? And now we're focusing on the outcomes. What are the outcomes that we as a sector can achieve to improve health and well-being, to improve local economies? And so that's an important part of strategic design as part of understanding local need, you go to talk to people. You can to your desktop research. We actually have to get out there and you have to have conversations. So having meaningful stakeholder engagement and partnering with organizations that it can introduce you to hard-to-reach parts of society is an important aspect of it. And we're doing that. And the discipline, a systematic measurement. And I know Andy's going to talk about that, where we're appreciating that we need to be treating this like any other business imperative. And the way we the way we measure is, is it comes across. So, you know, those are some of my learnings and some of the challenges, but some I'm very, very optimistic about the direction of travel.
Georgie Nelson
Yeah. And I think I think just to draw on two points that you've made there specifically that the partnerships piece, as you mentioned, is really crucial both within the building with your occupiers, but as you say, with other owners of buildings nearby, with local council, to be able to link all that together and actually provide a benefit to society. I think the second point I just wanted to pick up from was the standardization point because you have all of this regulation coming out from Europe and in the UK. So, the SFDR and the SDR and taxonomies coming out and a lot of them are focused on the environmental ones now, and it would be helpful to have some standardization on social aspects, although we need to also have maybe a bit of flexibility to have some innovation in the space. So, definitely agree with that point. And then as you started off your answer, Vivienne, you said that housing has a particular opportunity. So, I know there's a sector, both of you you've worked in and there's a there's a substantial contribution to society that the residential sector can have and has this been a sector where you personally seen the most opportunity from, from all the different sub-asset real estate classes?
Andy Smith
Yeah. I think over the last five years or so, we've seen a large number of affordable housing strategies where we've worked with a whole range of different investors from very small to institutional, huge investors. And I think that's because there's a real opportunity here. Both there's a huge need for long-term patient capital to come into the housing sector to speed up the rate of building new houses. That's something that's felt in the UK and Europe. There is this sort of underlying need for it. And also, you know, the returns potentially match very well with pension expectations and liabilities. So, the idea of a long-form capital providing long-term steady returns is potentially quite interesting for pension providers. In terms of the issue of reporting and standardization, actually it was on the back of some of our work we've done directly with impact investors here that we were approached back in 2019 to develop what's now the Sustainability Reporting Standard, which I mentioned earlier. The idea behind this is housing associations were being sort of bombarded with questionnaires from lenders, banks, etc., asking for this sort of ESG performance information. But these questionnaires were all different and they weren't necessarily fit for purpose. Housing associations weren't able to sort of put their best foot forward. So, we formed a working group with a number of large housing associations, as well as high street lenders and investors, and came up with a set of criteria that now are the Sustainability Reporting Standards. Initially, they were 48 slightly evolved over the years, as I mentioned earlier, and that these criteria are now standardized ways for housing associations to report back on their E, S and their G credentials, which is particularly of interest to the debt market, obviously, because if you are in a housing association, you probably need quite a lot of debt. And so, the lenders are able to make use of this information when assessing the sort of ESG risks associated with a potential investment or potential lender. So, it started in 2019, initially launched in 2020. We've now just 2023, We launched the second version of that as SRS Version 2.0. We've got over 140 adopters now as well. So about one in seven beds that are managed by housing association in the UK or managed by an organization that is an adopter of the SRS. So yeah, that's kind of how standardization can work in specific sectors.
Georgie Nelson
And just to join in on the affordability point as well, because I think there is a bit of confusion over the industry about what classifies as affordable housing, mainstream housing, etc. and it would be good to just get your thoughts on those different sort of definitions.
Andy Smith
Yeah, I think there's a few things there. One is the sort of like the a bit of a legal definition to do with policy and planning. And so, people think about this idea of affordable housing being 80% of market rate, which is sort of a legal definition. But I think for us we're much more interested in the sort of person-centred affordability. So, not relative to market, but actually we've made use of the Affordable Housing Commission's research, which says if people are spending more than a third of their household income on rent, they're being overburdened by rent. And so that's really always the start of tend for us. So actually, who can afford to live in this home without being overburdened by rents? Is it appropriate for median earners? Is actually only really affordable for people who are in the upper echelons or actually is affordable for people on housing benefits? So that's how we would start to assess the affordability of a potential kind of rented home thinking about this kind of person-centred affordability.
Georgie Nelson
Thanks, Andy. And one last thought from me about the opportunity residential offers in terms of not just on the affordability point, but in terms of the services a residential assets can have for people living there and how that can impact the well-being of their lives. And I wondered if you had any thoughts on kind of the metrics or measurement of those kinds of aspects?
Andy Smith
Yes. So, I think we see this in a whole range of organizations and a whole range of entities that housing associations historically have provided additional services and additional support for that for their tenants. That's really common. And at the other end of the spectrum potentially is really nice and that fancy, sort of build-to-rent accommodation will have maybe really strong amenities and potentially very exciting amenities which once again help bring people together and form communities, reduce loneliness, etc. So, kind of different ends of the spectrum, but with the same idea of kind of shared amenities. And actually, the support it's providing whenever we think about measurement of something like this, I think for us it always starts with a theory of change. So, we always want to understand what the change you're trying to achieve and how do your activities, your amenities, whatever it might be, how does it result in that. And then any management plan should really be measuring against that theory of change, and that will necessarily require understanding a bit about the outputs in activity. So, counting the number of events, number of sessions, number of hours of yoga that you're providing or whatever it might be. So, get partly counting the inputs, but also I think, you need to be speaking to people speak to the beneficiaries. So that's probably face-to-face. Maybe it's focus groups and possibly surveys can play a role as well because I think for us it's really important just to get that sort of granular understanding of is making a difference. You need to go beyond just counting the sort of the activities and the inputs.
Georgie Nelson
Yeah, close the feedback loop and make sure it's working and try to improve even more.
Andy Smith
Exactly that.
Georgie Nelson
Yeah. Thank you. And so, we've spoken a lot there about the system of investing spectrum, how the real estate sustainability agenda has moved environmental to social and what we're doing now, more on the social aspects. It'd be quite good just to sort of summarize with what you see is a future trends going forward over 2024 or longer term. So, Vivienne, I don’t know if you have some thoughts?
Vivienne King
Yeah, well I think there will be a continuum of the journey that the industry is on. At the very beginning, I talked about the fact that philanthropy has really been baked into the industry and I think with what we've seen is we're moving from philanthropy to looking at the way we deliver business our activity that has a social consequence. You know, we've been assessing sort of social value and we've been looking at the value of our inputs and the sort of financial value of our outputs and now where we're doing that. And at the same time, we're actually looking more broadly at the outcomes that we're achieving for society. And Andy mentioned loneliness earlier. How can we how can we urban loneliness is it is this it's a major problem? How can we deal with that? How can we improve a sense of belonging? How can we improve the individual well-being as the result of what we do? And we are being more thoughtful about the way we deliver our business activity, which can improve those sort of experiences for people at the same time. It's not one or the other. They work together and the better you make the environment for people around your assets, as I mentioned earlier, the better it is for your assets. Everybody wins.
Georgie Nelson
Thanks, Vivienne, and Andy.
Andy Smith
Yeah, unfortunately, I don't think it's going to be a reduced need for more housing. I think it's the needs are going to be greater. I think I think we're seeing more kind of innovative models coming in to try and tackle the affordable housing crisis, thinking both about affordable rent as well as affordable homeownership. I'm really interested in models that are looking around both shared ownership but also other sort of affordable routes to home ownership like the sort of rent-then-buy type models, of which there's a few of them out there. I think that could be really interesting. I think mostly in slightly sort of longer term, I think this idea of planning and how do we change? Is it possible to change the planning process, to accelerate and make it easier to build more affordable housing and more housing in general that look like it's the kind of that's the potential direction of travel. But it's one thing to talk about it even at a sort of policy point of view. It's another thing to sort of deliver against that.
Georgie Nelson
Thanks, Andy. So, we started the conversation open with your favourite sustainability moments of 2023. So, my final question for you both is if you can share something that inspires you to continue to drive sustainability by saying either in your personal or work lives, it might also potentially inspire our listeners. So, I'll go to you first Andy.
Andy Smith
Yeah, so I suppose a couple of films that I thought of when thinking about this. I think on the social side there's a film called I Daniel Blake, which is that you're familiar with? So yeah, it's brilliant, but it's really sort of, it just, it, it highlights the difficulty of living within the system of, of benefits and a whole range of different issues. But it's really, really human, it’s a really human film. So, I think that's really on the social side is the one. And on the environmental side, completely different, Don't Look Up, which is a sort of environmental allegory, which is just galling to watch and incredibly pertinent to the state of affairs on the environmental side.
Georgie Nelson
A good watch list for our listeners. And Vivienne, over to you.
Vivienne King
Yeah. On the film side, Inconvenient Truth is one that really grasped me early on and with big influence actually and in my sort of philosophy but something that I always have in the back of my mind, it's a quote from a guy who's a really big thinker, really creative mind in the real estate industry, Ibrahim Ibrahim and he says in order to be future ready, real estate must be driven by people and places and not solely real estate. And that's it for me. That's it. We should all follow that.
Georgie Nelson
That’s a brilliant quote to end on. Thank you very much. Well, thank you so much to the both of you for being with us today. It's been an absolute delight to have you on our podcast and the listeners. You've been listening to the abrdn's podcast, Sustainability Inspires, aiming to help you to get inspired and get involved.
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