Unlocking the Door to Global Impact Capital
By Bob Simpson
10 min read
Five Key Questions and a Path Forward
These days, it seems every commercial real estate investor is talking about Environmental, Social and Governance (ESG) and impact investing.
According to the U.S. Forum for Sustainable and Responsible Investments, global ESG investments have tripled since 2012 and now exceed $40 trillion.
This rapid growth creates an enormous opportunity for property owners and investors who are committed to providing safe, affordable and sustainable housing options for renter households across the United States.
There are 43 million renter households in the United States who—over the course of a year—will spend more time, consume more energy and spend more money on their rental property than any other place on earth.
That makes rental housing the perfect solution for impact investors in the real estate sector. After all, if you want to make an investment that directly impacts a person’s life, there is no better place to start than the place they live.
However, impact investing is still relatively new, so it can be challenging for property owners and investors to figure out how to incorporate impact-driven initiatives across their portfolio in a scalable and meaningful way.
The key is to develop an impact framework to guide your organization’s decision-making process that is meaningful, financially sustainable and measurable. While industry standards that guide what such a framework should look like do not currently exist, there are five key questions that property owners and investors should consider when developing their impact framework.
1) Does the investment improve the lives of the people who live in the properties you own or finance?
One of the most important lessons we have learned over the past few years in the rental housing industry is the importance of building stronger relationships between renters and property owners. Simply put, healthy and financially stable renters create healthy and stable rental properties. So, when we think about impact in the multifamily context, we must begin with the renter.
According to Harvard’s Joint Center for Housing Studies, nearly 11 million renters spend more than half of their income on rent. As a result, housing affordability must be a primary factor in any plan intended to deliver social impact.
Because of this severe housing cost burden, property owners must invest in programs that improve their renters’ housing and financial stability. Taking steps to increase acceptance of Section 8 Housing Choice Vouchers, reporting on-time rental payments to credit bureaus and offering streamlined emergency rental assistance support are good examples of improving your portfolio’s financial health and stability.
For individual properties, it is also important for owners and investors to build or partner with resident service platforms that meet the specific needs of the residents and increase their level of engagement with property owners and the broader community. Conducting a resident needs assessment is a good first step toward identifying the most needed services and improving the level of communication and engagement between renters and property owners.
Property owners must also be proactive in addressing their properties’ overall health environment. For example, incorporating measures that improve indoor air quality, increasing the amount of natural light and providing health and wellness programs can all improve residents’ overall well-being.
These actions will create more housing and financial stability for renter households and improve the stability of the properties by reducing costs associated with vacancies, evictions and bad-debt collections.
2) Does the investment reduce the carbon footprint of your portfolio?
This question may seem obvious today, but if you are not already focusing on implementing energy and water-
saving measures that reduce your properties’ carbon footprint, you are behind the curve. And, as the environmental impact investing sector grows up, these measures are now seen as “table stakes” by impact investors who are also requesting more quantifiable proof that your activities are indeed having an impact.
It’s also important to note that investors across the globe are increasingly holding property owners to ever higher standards. As a result, it will not only be important to demonstrate how your property is reducing greenhouse gas emissions but also how you are incorporating clean source energy and environmentally friendly building materials and construction techniques to further reduce your carbon footprint.
3) Can you prove your impact?
No impact framework is sustainable if it can’t be measured and proven.
The environmental impact space already has established metrics for measuring the impact of energy and water savings and reduced CO2 emissions. But as more and more countries focus specifically on goals to eliminate dependence on fossil fuels, it will be increasingly important for investors and operators to find ways to quantify the environmental impact of their building materials and sources of energy.
Measuring the impact of your ongoing initiatives is more challenging for social impact than the environmental impact space. It is much easier, after all, to measure a reduction in kilowatt-hours than it is to measure an increase in someone’s quality of life.
As the impact investing industry grows up, the need to better quantify social impact will continue to grow.
An excellent place to start is to focus on the areas where you can support your work with data or clear evidence—for example, quantifying the number of affordable units for low- and very low-income renter households. But if you want to differentiate yourself to an impact investor, consider adding other housing stability metrics, such as improved renter credit scores, increased lengths of stay and a reduction in the number of evictions for non-payment.
When providing resident services, make sure you conduct regular renter and community assessments to ensure you’re meeting the property’s specific needs. Implement research-backed programs and measure outcomes that do more than simply capture participation and tie into key economic, education or health metrics.
4) Are you generating a reasonable economic rate of return?
Just as multifamily owners and operators must consider their investments’ social and environmental impacts, they also bear a fiduciary responsibility to their investors. While returns on impact capital may be less than returns that could be earned in other less-impactful areas, it should not be confused with concessionary or philanthropic capital. Furthermore, property owners must demonstrate how the impact initiatives they implement improve the risk profile and financial stability of the property.
For example, do your energy and water savings reduce operating expenses and support higher returns on investment? Do the payback periods for your green investments make financial sense? Do they create marketable advantages for you with competing properties?
From a social impact perspective, the link between renter health and a property’s financial performance must be clear and quantifiable as well.
Do your social impact initiatives reduce vacancy costs or cut down on legal fees associated with evictions or bad-debt write-offs? Will segmenting out a portion of units at affordable rent levels drive longer lengths of stay? Or are you seeking to increase partnerships with local, state and federal programs that offer subsidies to help offset the costs of renting below-market rates?
5) Are you practicing what you preach?
To be a leader, we must be intentional about the impact we are trying to create. That means holding ourselves to the same standard as our ESG impact frameworks.
Here are some questions to ask:
- Are you incorporating diversity, equity and inclusion initiatives within your organization that provide economic advancement opportunities for underserved populations and ensure that your employees and subcontractors are more representative of the renter populations you serve?
- Do you hold your office space to the same environmental standards as the properties you own and operate?
- Are your employees being paid a living wage with good health benefits?
- Do you provide your workforce with the flexibility and support to address emergency child and elder care issues as they arise?
- Are you investing in your workforce with the same vigor that you are investing in your properties?
For most impact-focused companies, the answers to these questions are yes. However, they’re essential questions to consider as your business evolves and grows.
Without good governance policies and procedures, any organization’s impact investing framework is also not complete.
For example, have you adopted policies and procedures to protect against fraud and abuse? Are your employees empowered and protected, such as through established whistle-blowing policies at your company?
Compliance and reporting may not be the most exciting component of an impact framework, but they are critical. This is especially true for owners with properties that rely on partnerships with the public sector and that may have additional layers of reporting and oversight.
Governance is the backbone of a successful impact framework. It offers proof that what you’re saying is being done, and it helps develop a culture of impact across the organization that will grow and thrive in the future.
The Path Forward: Building Industry Collaboration
Considering these five key questions will go a long way toward helping investors and property owners build impact frameworks to guide their decisions. However, it is also critical that we work together as an industry to establish rental housing impact investments as a widely accepted and credible real estate asset class that increases the flow of global capital into our sector and gives investors comfort that the impact investments they make are consistent with rigorous, transparent and industry-specific standards and principles.
This month, we are announcing the establishment of the Multifamily Impact Council (MIC), a nonprofit membership organization, created to help the industry achieve this lofty goal. Specifically, the MIC will focus on three key areas:
1) Establishing and maintaining impact investing guidelines and principles for the multifamily industry. Specifically, this means achieving consensus across the industry on a set of principles for impact investing that are aligned with global ESG certifications and can be used to guide investing, product development and asset management decisions that provide meaningful and financially sustainable impact to renters, communities and the environment.
2) Developing a reporting framework that creates more consistency across the industry for impact reporting and can be used to both measure social return on investment (SROI) and quantify the financial impact of impact initiatives on property performance.
3) Collaborating with housing and environmental experts, industry associations and global ESG certification organizations to simplify the existing certification process, support research partnerships and share best practices and collaboration opportunities that support new and innovative initiatives to deliver impact at scale.
As impact investing continues to pick up steam in the multifamily sector, we must work together to build a collaborative framework that establishes housing impact investments as a widely accepted and credible asset class. If successful, we can increase the flow of private, global investment capital to support impact-driven multifamily initiatives that make sense to investors, are good for the environment and improve the lives of renter households who call multifamily properties home.
If you are interested in learning more about the Multifamily Impact Council, please contact Bob at [email protected].
