This article is sponsored by CIM Group
How is the regulatory environment evolving with regards to ESG, and what is your approach to compliance?
Our primary regulator as an asset manager – the Securities and Exchange Commission – is putting firms on notice when it comes to ESG. In particular, it is notifying the industry that managers that market incorporation of ESG factors in their investment decision-making must ensure they are accurate and transparent in what they say. The SEC’s focus on this area is largely driven by investor demand and by the increased prevalence of ESG in investment strategies and marketing material in the wake of the Paris Climate Accords.
The regulator is not making a value judgment on whether or not ESG is a good thing – it is looking to protect investors and ensure that advisers are providing them with what they are asking for.
What are the primary differences between the existing EU regulations and proposed US regulations? How will you build an integrated approach across the two?
The US is a few years behind the EU when it comes to implementing ESG regulation, but the SEC has released two proposed rules this year, focused on tackling disclosure and avoiding misleading information in marketing – in other words – combatting greenwashing. As we are subject to Europe’s Sustainable Finance Disclosure Regulation, of course, I see similarities between the two. Both regimes are intended to prevent investment managers from exaggerating ESG alignment, while increasing transparency.
“The questions that we are asked [by investors] run the full gamut from environmental concerns to social concerns”
One primary difference, however, is that the SEC is not making a judgment call on the veracity of climate change or the importance of addressing its implications. The EU Taxonomy and SFDR, on the other hand, are clear that we as asset managers have a duty to tackle climate change and the risks associated with it.
How would you describe investor attitudes towards ESG? How do they differ across geographies and how are they evolving?
Institutional investors are asking more questions about ESG. I have participated in calls with potential European investors, in particular, with incredible knowledge on this topic, and that level of insight and understanding certainly keeps us on our toes. The questions that we are asked run the full gamut from environmental concerns to social concerns. But while European investors may be more sophisticated in this area today, curiosity and demand for ESG alignment is high across the board.
How do you ensure that ESG is factored into asset selection and due diligence?
CIM has been focused on sustainability for a number of years, but more recently we have transitioned to a full-fledged ESG programme. We hired our first head of ESG at the beginning of 2022. Not only are we working hard to gauge the amount of energy and water our assets use, and the amount of waste they produce, using platforms such as the Energy Star programme, we are also looking at making positive changes in these areas.
As we transition from just tracking consumption to also addressing consumption, we are increasingly pulling these factors into our investment decision-making process. Within our infrastructure strategy, where necessary, we have created an underwriting checklist to ensure that we address not only applicable regulations, but that we also meet investor demand around ESG alignment. This includes tracking and reporting on potential adverse impacts and documenting how those will be mitigated or addressed through the life of the deal.
In addition, CIMpact is a part of our business that engages with services such as Habitat for Humanity International and other societal projects. We recently visited a school in South Los Angeles, for example, helping to paint murals with high-school students and educating them about what private markets investing is. I was even able to offer an internship to one particular high-schooler who expressed an avid interest in what we do. She also happened to be a member of an underrepresented group. Improving diversity and inclusion is another element of our ESG programme.
What challenges have you experienced relating to DE&I and which strategies have you found to be effective in addressing that?
One of the primary challenges that we face is simply making sure that we are reaching the right audience. To that end, we have an initiative called the Ambassador Programme, where we plan to visit certain high schools and colleges to educate students about the opportunities that exist at CIM and in the real estate investment industry as a whole. If you ask a 10-year-old what they want to be when they grow up, they are not likely to say “a compliance officer” or “head of communications at a private equity firm”. So the impetus for this initiative is to bring awareness about the careers in our industry, and to target schools with more socially and economically disadvantaged and racially and ethnically diverse students.
Of course, the other challenge is to retain diverse talent once people have been brought into the organisation. That involves ensuring we are providing appropriate training to management and proper support to team members that belong to these underrepresented communities through initiatives such as mentoring programmes.
How do you engage with the communities in which your assets exist?
We tend to focus on urban areas, which can involve more diverse communities. Sometimes people feel that change is not warranted, which is a challenge we have faced. Tackling that primarily comes down to effective communication. We spend a lot of time in these communities, learning about their challenges and explaining how we can add value. We want to ensure that residents are aware we are not there to push them out of their communities, but rather to enhance their way of living.
How important do you believe ESG to be at exit and in value creation overall?
All the regulation coming out of the EU – and which seems likely to soon be implemented in the US – coupled with growing investor demand and heightened awareness of environmental and social issues generally, mean that ESG credentials are being analysed at every step of an investment in terms of both risk assessment and opportunity. Those risks and opportunities are therefore being captured in terms of both discounts to valuations and premiums in a way that would not have happened in the past.
Armed with all this information, asset managers can either make the decision to walk away from an asset, factor ESG risks into the offer price or take steps to mitigate those risks early in the life of their investment so that there is no detrimental impact to their ultimate return. I believe ESG performance is inextricably linked with financial performance in today’s market.
How do you see this field of ESG evolving within private market asset classes, and how are you evolving your own programme to meet those demands?
We are taking a holistic approach in further aligning our business to ESG. That includes everything from focusing on tenant satisfaction at the asset level to further incorporating consideration of ESG factors into our investment decision-making processes. Other goals include assessing the development side of our business for ESG-alignment opportunities, focusing on more sustainable materials, for example; as well as incentivising commercial tenants to use energy in more efficient ways and to reduce waste.
CIM also has a history of investing in renewable energy infrastructure, including an investment we made last year in Aquamarine, a 250MW solar photovoltaic project in California. The project can contribute to economic development by diversifying a region historically reliant on agriculture, and through the creation of more than 400 clean energy jobs.
Meanwhile, the project, one of the largest permitted solar parks in the US, has the capacity to grow to more than 2.7GW of renewable energy at full buildout, which would mean providing clean energy to more than 1.2 million homes. Continuing to invest in projects such as this is an exciting part of our ESG and sustainability agenda.
What is your approach to measuring and benchmarking ESG, and what challenges can this present?
The collection of data is undoubtedly one of the most challenging aspects of aligning our business with ESG. There are areas where either timing or technology may not permit the collection of the data that we would ideally like. Indeed, data collection and benchmarking are industry-wide issues. Even GRESB focuses heavily on governance aspects when it comes to infrastructure. There is still a lot further to go when it comes to the environmental and social aspects of ESG and infrastructure investing.
A lot of that is because such a wide array of investments sit under the infrastructure umbrella and it is difficult to formulate parameters that are relevant across every sector. Trying to first capture the data, and then ensure it is collated in such a way that firms are scored fairly, is a significant challenge when it comes to benchmarking and one that the industry is still trying to address.