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The 'G' in ESG under the spotlight

Sept. 8, 2022

Taken from an article published in Property Week on 8th September 2022, here: The ‘G’ in ESG under the spotlight | Insight | Property Week

Russia’s invasion of Ukraine is an appalling event that has shone a light on the activities of some of Britain’s most respected property brands, which have transacted with oligarchs alongside global agencies that were forced to rethink their presence in Moscow.

So far, property seems to have escaped the fallout relatively unscathed considering its alleged exposure – few details have been unearthed on how sanctioned oligarchs amassed sizeable London estates. However, UK commercial landlords have earned plaudits for reviewing relationships with Kremlin-linked tenants.

While the human catastrophe is by far the biggest impact from this disaster, the ripples have been spreading across all our lives as well as the business world.

The cost-of-living crisis is gripping the nation – one friend drove to the south coast for a day trip recently to notice the cost of fuel had risen by 10% at the same garage on his return journey – and is making people seriously reconsider their energy consumption. This of course feeds into the ESG agenda.

So, Russia’s invasion of Ukraine has made people think even harder about the ‘E’ (environmental) and ‘S’ (social) in ESG; but what about the ‘G’ – governance – aspect, which so often gets overlooked?

This is where this year’s unfolding events may, in the long term, have an equally forceful impact on real estate: because governance in property has, for years, been an unspoken subject – tacitly ignored as respected names use legal tax avoidance measures to reduce their contributions to the public purse.

But the invasion of Ukraine has thrown a spotlight on governance. According to Morningstar, nearly 13% of 370 sustainable funds held Russian stocks at the end of 2021. The $88m (£73m) Artisan Sustainable Emerging Markets Fund, for example, had invested 8% of its assets in Russian firms including goldminer Polyus, energy giant Lukoil and lender Sberbank.

The Ashmore Emerging Markets Equity Fund had a 5% weighting in Russian companies including discount store chain Fix Price Group and online recruiter HeadHunter, triggering clients to pull $3.7bn from its $87bn fund in Q1.

Meanwhile, Raven Property Group, a FTSE 250 constituent, had no choice but to de-list earlier this year after being compromised by Russian sanctions, despite no suggestion of direct impropriety. This has triggered an across-the-board reappraisal of the explicit and implicit risks of owning any potentially questionable shares, putting warranted pressure on disclosure requirements.

Parallel to this, we are seeing a shift in mindset that is feeding through to the man on the street, with two thirds of retail investors’ investment decisions now affected by ESG issues.

Against this backdrop of increasing scrutiny on governance in real estate and greater demands for transparency, the way assets are admitted to trading on IPSX as single-purpose vehicles reassures investors that their investment is being handled responsibly.

A detailed prospectus at single-asset level plus full disclosure of rental performance, low management costs and exhaustive sustainability credentials are key as a spotlight is shone on governance across the business world. After all, why shouldn’t real estate investors demand as much transparency as possible?

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