FTSE Russell has unveiled the FTSE EPRA Nareit Green Index series, a new series of real estate indices that tilt towards energy-efficient and renewables-linked properties.
David Harris, Head of Sustainable Investment at FTSE Russell.
While ESG (environmental, social, and governance) focused strategies have become abundant amongst equity ETFs, and are becoming increasingly popular with fixed income funds, real estate is an asset class that has yet to properly explore such tools.
The new series is seeking to change that by providing an extension to the FTSE EPRA Nareit Real Estate Indices – globally recognized listed real estate benchmarks which are tracked by over $340 billion in assets.
The FTSE EPRA Nareit indices are managed in partnership with the European Public Real Estate Association (EPRA) and the National Association of Real Estate Investment Trusts (Nareit), the US-based association for REITs and publicly traded real estate companies.
The new green indices tilt the weight of constituents in their parent indices to favour those firms with higher ‘Green Certification’ and lower ‘Energy Usage’ scores. A company’s Green Certification score is determined through the proportion of its total net leasable area that is dedicated to producing renewable energy, while it’s Energy Usage score is derived using its average energy consumption per square metre of net leasable area.
To assess the sustainability performance of the constituents, FTSE Russell harnesses building-by-building geolocation data mapping from GeoPhy. GeoPhy currently maps over 15 million buildings which covers real estate holdings for 93% of the constituents of the FTSE EPRA Nareit Developed Index. This data is then matched with green certification data and provides the basis for detailed energy use and carbon emissions modelling.
The indices are reviewed and rebalanced annually in September.
According to FTSE Russell, the methodology results in a similar risk/return profile to the parent indices while significantly improving climate and sustainability performance.
For example, the FTSE EPRA Nareit Developed Green Index – the debut index in the series – increases green certification by 63% while carbon emissions per dollar of revenue drop by 40% compared to the parent FTSE EPRA Nareit Developed Index.
Firms from the US make up over half (54.9%) of the total weight of the index, with the next largest country exposures being Japan (11.2%), Hong Kong (7.0%) and Australia (5.1%). The largest sector exposures are industrial & office REITs (23.1%), retail REITs (20.4%), real estate holding & development (19.6%), and residential REITs (13.4%).
The index currently offers a dividend yield of 3.9%.
‘Greening’ the real estate sector is a major challenge for the transition to a more sustainable, low-carbon economy. According to UN estimates, buildings account for over half of global electricity usage and approximately 28% of global carbon emissions.
Investment vehicles, such as ETFs, that are linked to green real estate indices may play an important role in driving capital towards more sustainability focused end-users and investors may not need to sacrifice return in order to invest in real estate along ESG lines. FTSE Russell notes there is growing evidence linking better environmental performance to higher asset values, higher occupancy rates, higher rental yield and lower operating costs.
David Harris, Head of Sustainable Investment at FTSE Russell, commented, “As the low carbon transition accelerates, it is imperative for investors to navigate climate-related risks and opportunities. Working with EPRA and Nareit, the new green real estate index series from FTSE Russell will help the market to drive an ambitious sustainability agenda and provide investors with innovative tools to assist in this transition.”