A key challenge is the indirect nature of relationships between investors and ESG performance in the property sector.
When investing in public companies, investors may be able to more easily influence outcomes through direct dialogue, because the companies in which they invest have more immediate control over their plants or branch offices, as well as the managers and employees who run them. With the property sector however, this agency chain is weakened by the indirect nature of many of the most relevant relationships.
- Investors commonly invest through external fund managers. These managers determine which buildings to acquire or develop and what kinds of capital improvements are warranted.
- Fund managers may choose independent property managers to run the properties and interact with the tenants. This outsourced property management can involve contracting with independent security, energy, cleaning, solid waste and other service providers.
- Tenants are independent firms that, once a lease is signed, are free to use a property as they wish (within normal lease constraints). While tenants have contractual relationships with the property managers and owners and may be contractually required to act in certain ways, they do not have an employer-employee relationship with the property owner, eliminating an avenue of influence available to owners of listed equities through the managers of the companies they own.
- Investors may not be the sole or major owner of a property or property portfolio. Investment vehicles such as joint ventures, pooled property funds, and investment trusts – as compared to direct investments or separately managed accounts – result in any given investor being just one of many owners, which further dilutes their influence over investment and management strategy.
- There is the eco-efficiency principal-agent, or split-incentives, problem common to rented properties. When landlords pay for conservation measures and tenants pay for utilities, there are few incentives for owners to take actions that yield savings for tenants or for tenants to make capital efficiency improvements that revert to landlords when they vacate the premises. Conversely, when landlords pay utility bills, there are few incentives for tenants to moderate their behaviour, which is a major factor in conservation. Without some form of shared-savings contracts that benefit both parties, progress toward eco-efficiency in property will not achieve its full potential
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