In this third podcast of our program "Parlons Tertiaire", broadcast on Radio Immo on September 29, 2021, Chloé Rayssac and Sylvain Levy-Valensi welcome Thomas Rochefort, Founding Partner of Ethiket, and Estelle Ginefri, Head of CSR & Innovation at Foncière Magellan.
In this episode, we discuss the first feedback on the implementation of the ISR label (French label whose objective is to offer greater visibility to investment funds that respect the principles of socially responsible investment), from an operational point of view in the companies. We focus on the feedback, which is far from being as obvious as we thought. We also discuss the sustainability of the model and its future issues.
Enjoy your listening!
(Audio only available in French)
Chloé Rayssac:
Thomas, can you remind us of the context and main principles of the ISR label?
Sylvain Levy-Valensi:
And, most importantly, why was this label created and what is its purpose?
Thomas Rochefort, Founding Partner of Ethiket:
The ISR label was introduced in France in 2015 and initially focused on financial securities. It originated from a government initiative to prevent greenwashing. The ISR label is a state label, which means it is a ministerial decree that outlines the requirements for asset management to be able to use the ISR term in France. Real estate assets and funds were initially excluded from this process due to technical reasons. As a result, a working group of real estate professionals was formed. In 2016, ISR was not making headlines, and ESG (Environmental, Social, and Governance) issues were not a central concern. This group of real estate professionals, who were convinced of the importance of sustainable investment, had the opportunity to work on this topic without much interference. We worked for two years to draft a preliminary label, which we presented to the government, including the Treasury Department, which is responsible for the ISR label, and the AMF (Autorité des marchés financiers), which is the regulatory authority for investment funds. There were over a year of discussions to refine the requirements, finalize the wording, and gain approval from the ministry responsible for this matter. Finally, the decree was issued on July 23, 2020, marking the birth of the ISR label and its real estate component. That's a bit of the context and history.
Now, how do we implement this ISR label? After two or three years of work, we reached a conclusion. The challenge is to work on existing real estate assets and make them more sustainable. This requires investment, financial management systems, and an investment system. The entire process of the label can be summarized in one sentence: we say what we do, and we do what we say. The label provides the framework for an asset management company to claim adherence to the ISR approach by ensuring that measurement indicators, commitments, and management processes are all aligned with the stated objectives for investors.
Sylvain Levy-Valensi:
By nature, real estate assets are heterogeneous and cannot be compared to one another in terms of territorial and metropolitan structure, among other factors. Therefore, from a macroeconomic perspective, generalization is not possible, which is a disadvantage of the ISR label, as it inherently deals with heterogeneous assets. However, there are processes within the label that have measurable impacts and can be developed. This is precisely what Bazimo does in its process, simplifying the flow of information.
This represents significant challenges for asset managers who currently handle these assets. Estelle, what challenges do you face in streamlining the management of all this information, which largely comes from technical management because, for a real estate investment trust (REIT), it is not easy to highlight all these aspects?
Estelle Ginefri, Head of CSR & Innovation at Foncière Magellan:
For a REIT, there are two aspects to consider. First, as Thomas mentioned, there is the definition of the framework, which involves clearly stating and discussing with our investors the ISR objectives for each fund. Our first labeled fund, “Foncière des Praticiens”, focuses on healthcare real estate. The fund includes assets such as medical facilities, day psychiatric hospitals, and centers for autism, among others. Like any other fund, we raise capital with the purpose of investing in these types of real estate assets. However, we specifically emphasize the three pillars of environmental, social, and governance factors and define the ISR strategy for this fund.
Regarding the social aspect, there was already a historical fund dedicated to sharing profits with three associations. However, with the ISR label, it is important to note that having a healthcare theme alone is not enough to qualify for the ISR label. We have the same level of requirements for environmental and governance factors as for social factors, even for a healthcare-focused fund.
Sylvain Levy-Valensi:
So, even a profit-sharing REIT is not necessarily qualified to obtain the ISR label?
Estelle Ginefri:
Not at all, because the label focuses specifically on real estate assets, whereas the profit-sharing fund is evaluated based on the fund itself, regardless of the assets it invests in. Each asset has its own rating, and then we can assess the fund, but in any case, an ESG framework is applied to each asset.
There is a requirement set by the ISR reference framework to obtain the label, which involves demonstrating an improvement process. If, at the time of acquisition, an asset falls below the defined minimum rating, which serves as the baseline, the goal is to have the capacity to achieve progress and exceed that minimum rating within a three-year timeframe.
Sylvain Levy-Velensi:
So, there is an investment committee that must comply with a set of standards, including the framework and specifications of the ISR label. If an asset doesn't meet the requirements, would you still acquire it and make it eligible for the ISR label?
Estelle Ginefri:
It's not solely about the label's name. To meet the ISR label requirements, we need to demonstrate that we will be able to reach a predefined level. Starting from the pre-investment committee stage, we go deep into the decision-making chain, evaluating the starting point and considering the capital expenditures (CAPEX) or actions and resources to be implemented within three years.
Sylvain Levy-Velensi:
So, you could acquire an asset and make it eligible and compatible with the ISR rating? Does that mean neglected assets could find new life with proactive and creative REITs?
Indeed, there is almost no more urban sprawl, and there are no more vacant lands. Therefore, the deconstruction, reconstruction, transformation, or rehabilitation of certain assets becomes interesting. Thomas, this is good news for healthcare, isn't it? Even though it's a solid business with great reports in this area, the fact that investors are engaged indicates that there is a market, but at the same time, it serves the collective interest.
Thomas Rochefort:
Exactly. We should not forget that 85% of the assets in 2050 already exist today. So, when I mentioned the importance of the real estate ISR issue, it's not about focusing on new assets that go from RT 2000 to RE 2020. While that regulation is important, we need to be demanding in terms of new constructions. However, that won't solve the problem entirely. We need to work on these existing 85% of assets, and as real estate professionals, we should focus on that. The ISR label encourages an improvement approach toward these impacts rather than merely a selective approach.
Sylvain Levy-Valensi:
Estelle, have you faced any difficulties in the initial capital raising for your "Foncière des Praticiens" fund?
Estelle Ginefri:
Not particularly. It's worth noting that, although COVID had a significant negative impact, it also shed light on the healthcare sector and the essential workers during the pandemic. It also highlighted the lack of public healthcare infrastructure in the country. So, this focus on healthcare was already identified when creating this fund, and it resonated well with our distributors and investors.
Sylvain Levy-Valensi:
Thomas, based on what Estelle just mentioned about the main recommendations, what do you tell your clients? What are your key recommendations?
Thomas Rochefort:
It's important to explain to them that there are several ways to look at the ISR label, including anticipating upcoming regulations. We are riding a trend, a deep-rooted movement that will not reverse but continue. For example, there is the taxonomy, the disclosure regulation, the tertiary decree, and the decree on refrigerant fluids. All these elements will come into play. Having an ISR approach allows for a comprehensive view of these assets, specific to each asset class. For Foncière des Praticiens, which Estelle didn't mention, we have a specific ESG evaluation grid tailored to the healthcare sector. Each fund will have its own ESG grid, well-suited for comparison among assets, which, although heterogeneous, will differ even more between residential and office funds. This grid can be adapted according to the objectives—top-down approach: What do we want to achieve? What do we want to communicate to our investors and persuade them to entrust us with their money? The second approach is bottom-up, without forgetting that measuring the impact and collecting data becomes significant when dealing with a substantial asset portfolio.
Chloé Rayssac:
Regarding this, have you encountered any difficulties in data collection? What about operational challenges?
Estelle Ginefri:
Currently, we are primarily focused on involving the technical managers who are our daily relay on the ground and may not be familiar with the ISR label. We start with explaining the fund's approach to them. We co-developed the ESG evaluation grid for assets, which enables smoother data collection as they understand the integration and their role in the process. However, it doesn't solely rely on them; we also have assets and property in-house involved in the process. But it's clear that it won't happen without the technical managers and tenants. We need them to provide access to certain data and provide feedback because, especially in the social pillar, we rely on them to share their needs. For example, with Foncière des Praticiens, we're targeting doctors, and their primary focus is patient care, not necessarily responding to satisfaction surveys. There are no confidentiality issues, but their time dedicated to answering questions may be limited. We face similar challenges when implementing the tertiary decree because we enter the private areas of our tenants. That's where our proximity as a REIT and our ability to conduct on-site technical audits and explain the process come into play.
Sylvain Levy-Velensi:
You measure the energy performance of your assets individually, and you can provide the carbon footprint of each asset, right?
Estelle Ginefri:
Yes, those are the two indicators that are mandatory in the reference framework and are common to all labeled funds. They are indeed important data.
Sylvain Levy-Valensi:
At Bazimo or in your tech structure, do all these factors influence or shape the development of your tools?
Chloé Rayssac:
Absolutely. The original idea behind Bazimo was to collect all the data. Today, our clients' demand is focused on the ESG and ISR part. We aim to assist them in data collection, especially from tenants. Many tasks are still done manually, and the goal is to automate reminders to tenants and create a connection. Digitalization doesn't mean removing the human touch, but it eliminates low-value tasks, allowing us to concentrate on the relationship between managers and occupants without constantly sending reminder emails, for example.
Thomas, there is a lot of talk about harmonization at the European level. Do you have any insights or information about that? Can we expect surprises?
Thomas Rochefort:
Well, surprises will occur regularly, and I don't know all of them. The Disclosure regulation aims to standardize reporting in this regard. However, it remains quite challenging for real estate, except for the energy consumption and greenhouse gas emissions. Even there, we face significant issues. We can somewhat control what is called scope 2, but scope 3, which includes construction techniques and mobility to reach a building, is something we struggle to measure, even though it represents a significant portion of the building's carbon footprint. There is no harmonization yet in this area. So, there is harmonization for the basics we know, such as energy consumption and greenhouse gases, but there are still many expert debates on what is possible to do. Therefore, I would say, in terms of real estate, let's measure what we can measure, but let's do it well and reliably because that's what investors will seek. We need reliable figures to demonstrate and show the impact to investors.