We discuss the above issues with the manager during the comprehensive due diligence phase and have typically sought their agreement on these matters or asked for examples of reporting/policies/case studies to gain comfort that they will provide information we need. Our legal due diligence is undertaken by an external legal firm to review the fund documents in comparison to the GIP preferred fund terms and any anomalies are negotiated or noted. Where these issues are included in the manager’s policies and processes we do not require them to be documented in the fund agreements
In Side Letters we request the participation in the GRESB annual survey and for the principle use of the building to not involve socially harmful sectors e.g. gambling, child labour, armaments, prostitution, pornography, tobacco, endangered animals etc. and we are also now engaging on the implementation of the TCFD recommendations.
Many managers are adverse to having E & S issues included in the fund documents but are comfortable with inclusion of additional governance terms. They prefer to have a verbal or email exchange agreeing to how they report or involve ESG in their investment decisions – we would typically seek evidence of this in their investment process guidelines or policies during the due diligence process.
With GRESB’s new modules for developers, we are encountering less resistance from development oriented funds who were previously concerned of how their funds would score compared to those with existing investments. For value add funds, we encourage managers to view their GRESB results in line with their strategy i.e to refurbish buildings and improve the overall efficiency and design, or the improvements they can make to ESG performance through improving operational procedures or including upgrades through the building life cycle capex plans.
We have also encountered resistance from some managers with including “tobacco” and “alcohol” in the undesirable sectors exclusion wording as these industries are big users of real estate space and there is confusion over the degree of enforcement. For example, if a prospective office tenant is a large organisation that has a subsidiary that makes whisky, does the fund manager have to reject their tenancy. Everyone is comfortable with exclusion of child labour, prostitution, pornography and the like but there is some confusion around storage of armaments e.g. if a warehouse is used to store bullets and small arms munitions to supply the national army, is this not a government service and a government has the right and a public requirement to defend its borders. In this instance our preference is for the investee fund not to invest in the building. For those managers operating in emerging markets where labour laws are quite different to those in developed western countries, there is some hesitation about accepting the exclusion of “questionable labour practices”, and we typically direct them to the ILO for reference to acceptable space for sleeping arrangements for workers etc. or in some cases where the investee fund is from a more developed country we encourage or require them to apply the same workplace health and safety standards they would use in their home country, to construction sites in countries where the labour laws may not be as rigorous.