An increased focus on impact investing and a drive to repurpose buildings instead of building them from scratch, in every sector except data centres, is advancing NZ Super’s sustainable investing strategy for real assets.
“We have been spending more time looking at impact investments in real estate both in New Zealand and abroad in order to combine social outcomes with financial returns,” Toby Selman, who is in charge of property investment strategy at the sovereign wealth fund, which has NZ$60 billion ($37.1 billion) in assets under management, told AsianInvestor.
“We're looking at opportunities in the living sector, including build-to-rent, key worker and other affordable housing,” he said.
Selman said the majority of suitable impact investing opportunities were in the US, that the sector in Europe was growing, and that – apart from in a few locations – Asia was undersupplied. “In Australia, opportunities in disability housing and social housing are increasing,” he said.
His comments follow endorsements of impact investing by other major investors in the property sector and beyond.
In March, Stan Bertram, associate director for private real estate ESG at Netherlands-headquartered pension fund PGGM Investments, said the fund was pursuing socially targeted investment themes, such as investing in a fund focusing on old age care. “To create that type of property is a way of making a social impact,” he said.
“[If scoring] doesn’t work to exclude some products or services that are unethical, it is wishful thinking that you'll end up with a sustainable portfolio,” he said, challenging the notion that an ESG scoring model rewarding companies performing well in some areas but poorly in others could reliably build a sustainable portfolio.
Selman said that recent higher construction costs added to the long-standing environmental benefits of repurposing buildings.
“Across the board, inflation has meant higher costs in labour and materials, increasing replacement [rebuilding] costs,” he said.
With a large number of building owners under increasing debt and re-financing pressure following interest rate increases, Selman said that securing competitive prices for buildings meant that, in many cases, it was now possible to acquire and convert buildings at less than the replacement cost.
“And where we can derive a sustainability value premium through repurposing, by improving a building’s energy efficiency, there's an additional benefit,” he said.
Selman said the fund was considering such conversions in all sectors apart from data centres, where the scarcity of buildings and highly technical operating requirements necessitated building from scratch.
“The required data centres don’t exist, and these are energy-hungry buildings," he said. "Therefore, by building them new we can ensure they're more energy-efficient, optimising renewable power sources.”
Selman emphasised the need to limit the environmental impact of such building projects, adding that the fund was concentrating on improving the design of new and existing data centres in partnership with Hong Kong-listed real asset manager ESR. The fund made a substantial allocation last year to the Asia-focused ESR Data Centre Fund, but Selman declined to reveal the size of the investment.
He pointed to the need for more sustainable construction techniques and a focus on energy and water efficiency in running data centres. Innovative water use solutions help reduce the amount of water consumed by technologies such as evaporative cooling, which exposes warm air from a data centre to a body of water, reducing the air temperature as the water evaporates.
Selman emphasised the importance of using renewable energy to power data centres, including self-generated power from solar panels on site in some cases, on which the fund is working with ESR.
Many of NZ Super's real asset allocations last year have a sustainable dimension. They include the Wellington Climate Innovation Fund, the Al Gore-founded Generation Sustainable Solutions Fund, the Copenhagen Infrastructure Partners wind farm project and forestry giant Timberland.
Selman told AsianInvestor in March that the fund was expanding its allocations to logistics.
“We're bullish on logistics and specifically we like the market in Asia, which is fundamentally undersupplied with grade-A logistics units when compared to the US,” he said.