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Investment Returns from Responsible Property Investments: Energy Efficient, Transit‐oriented and Urban Regeneration Office Properties in the US from 1998‐2007

This paper breaks down the way responsible property investment factors impact income, property values, capitalization rates, price appreciation and total returns.

Introduction

Investors are increasingly interested in corporate social responsibility and socially responsible investing (Hill et al. 2007, Schueth 2003). Since the 1970s, socially responsible investing, or efforts to maximize both financial return and social good, has grown into a global movement (Louche and Lydenberg 2006). Over 360 asset owners, investment managers and financial service providers, representing over $15 trillion in assets under management, have signed the UN Principles for Responsible Investment which “help investors integrate consideration of environmental, social and governance (ESG) issues into investment decision-making and ownership practices” (Principles for Responsible Investment 2008).

The application of responsible investing and corporate social responsibility to the property sector has come to be called Responsible Property Investing (Mansley 2000, McNamara 2000, Newell and Acheampong 2002, Boyd 2005, Lutzkendorf and Lorenz 2005, Newell 2008, Pivo 2005, Pivo and McNamara 2005). Recent surveys have documented its emergence around the world (Pivo 2007, Rapson et al. 2007, UNEP FI 2007).

Responsible Property Investing (RPI) has been defined as maximizing the positive effects and minimizing the negative effects of property ownership, management and development on society and the natural environment in ways that are consistent with investor goals and fiduciary responsibilities (Pivo and McNamara 2005). Specific strategies include energy conservation, green power purchasing, fair labor practices, urban regeneration, safety and risk management, and community development, among others (Pivo and UN Environment Programme Finance Initiative Property Working Group 2008). RPI goes beyond compliance with legal requirements to better manage the risks and opportunities associated with social and environmental issues. It encompasses a variety of efforts to address ecological integrity, community development, and human fulfillment in the course of profitable real estate investing. The goal is to reduce risk and pursue financial opportunities while helping to address the challenging public issues facing present and future generations.

Because so many factors contribute to the social and environmental performance of buildings, RPI touches on literally dozens of property location, design, management, and investment strategies. However, a recent effort to prioritize RPI criteria found that experts, giving consideration to both financial materiality and the general public welfare, would emphasize “the creation of less automobile-dependent and more energy-efficient cities where worker well-being and urban revitalization are priorities” (Pivo 2008). Based on this finding, our paper examines 3 types of RPI properties: those close to transit stations, or so called “transit-oriented” properties, energy efficient properties, and properties in areas targeted for urban revitalization. Our general study question was how did these properties perform as investments compared to otherwise similar properties without these attributes?

A survey of senior US property investment executives found that concerns over financial performance and fiduciary duty were potential impediments to RPI (Pivo 2007). Still, more than 85 percent of the executives agreed that they probably would increase their allocation to such activities if they met their risk and return criteria. This paper targets these impediments by examining the financial performance of RPI properties in the USA. In particular, it studies how energy efficient properties, properties near transit (“transit-oriented properties”) and properties in areas targeted for urban regeneration (“urban regeneration properties”) have performed financially over the past decade in comparison to those without such features.

If RPI enhances investment returns, there are both business and fiduciary reasons to pursue it. If it has a neutral effect, then it makes economic sense in social welfare terms and moral sense because social or environmental gains can be achieved without harming financial results. But if RPI harms investment returns, it will be difficult for investors to justify or defend absent government requirements or incentives unless they are willing to trade-off lower returns for social or environmental gains. Findings are mixed on whether individual investors will sacrifice financial returns for social responsibility and the degree to which financial returns influence the decision to make socially responsible investments (Rosen et al. 2005, Nilsson 2007, Vivyan et al. 2007, and Williams 2007). But if RPI harms returns it will likely face legal and economic resistance. Therefore, if RPI is to become more common among institutional investors, it is important to find related approaches that are neutral or positive for financial returns.

Salzmann et al. (2005) reviewed the business case for corporate social responsibility (CSR), which they found to be a concern in the literature since the 1960s. Although theorists agree there are non-economic reasons to pursue CSR, considerable theoretical and empirical work has focused on the relationship between financial performance and environmental/social performance. Theorists have argued whether the links are positive, neutral, or negative while empirical studies have been “largely inconclusive” due to research biases and ambiguities.