Guidelines

The investment manager should ensure that the vehicle complies with applicable ESG laws and regulations.

The investment manager should comply with, and act in the spirit of, (i) the applicable laws and regulations relating to ESG issues (such as, SFDR, EU Taxonomy, CSRD, etc. (see list of abbreviations in Appendix 4 under Tools and Examples)) and (ii) the constitutional documents of the vehicle which may, among other things, adopt voluntary frameworks with respect to ESG issues such as GRI, TCFD, SASB, UN SDGs, UN PRI and others. Vehicles should also be prepared for any future legislation that may be undertaken over its life cycle.

The investment manager should have appropriate systems in place to monitor compliance.
 

The investment manager should develop and formally document its ESG strategy and objectives as a component of its overall goals related to the vehicles it manages, as relevant.

Acting ethically requires the investment manager to ensure that the overall goals of the vehicle consider and include a clear ESG strategy and objectives specific to that vehicle. The vehicle documentation should clearly outline these elements.

Building a practical and robust ESG strategy starts with a broad consideration of the ESG risks and opportunities that are material to the vehicle and its environment, including the society in which it operates over its lifetime, based on an appropriate materiality assessment. Consideration of recognised frameworks can support this process.

Furthermore, there are vehicles that are designed under various “impact investing” scenarios, subject to qualifying criteria that may be adopted. For example, refer to INREV’s definition and framework of Impact Investing.

The investment manager should identify and understand the interests of all major stakeholders with which the vehicle transacts and interacts (see also G07 of the Governance module). Regular consultations with these stakeholders, employees and relevant third parties may be helpful. The outcome should be clear ESG objectives that can be incorporated into the overall vehicle goals.

The consideration of an appropriate ESG strategy is an important element in the development of new vehicles. Depending on its strategy and objectives, an ESG strategy should also be considered and developed for an existing vehicle, to the extent feasible. Relevant considerations when building an ESG strategy are diverse and will vary over the lifetime of the vehicle. The relevance of the individual components needs to be monitored on a regular basis and specific objectives and planned outcomes adjusted accordingly. Factors to be considered as part of this process include but are not limited to those listed in Table 1.

The strategy should outline which ESG factors are relevant to the vehicle, the related vehicle-specific objectives and how these will these topics be monitored during its lifetime. The investment manager should clearly define in the vehicle documentation an outline of this strategic plan by reference to the specifics of the vehicle, including the location and type of assets and the nature of its operations.

Table 1: ESG Factors

Notes:
1. See Table 1 of RG73 and Appendix 1 of the INREV sustainability reporting guidelines for the list of INREV ESG KPIs
2. For more details, please refer to INREV Governance module.
 

The investment manager should ensure that the vehicle’s ESG strategy and objectives include a climate change strategy to assess and manage climate-related risks and opportunities.

The investment manager should ensure climate-related risks and opportunities are included as part of its overall strategy. The investment manager should ensure that its operations are aligned with the long-term objectives of the Paris Agreement with respect to carbon emissions.

The vehicle’s climate strategy should include the definition of a science-based pathway specific to the vehicle, which is aligned with the overall goal of a transition to a low-carbon economy. This pathway should outline a reference base case and time horizon which has been stress-tested to reflect resilience against different climate-related and other scenarios and their potential impact on the financial performance of the vehicle.

Monitoring the vehicle’s performance against these objectives should be an integral part of its operations.
 

Refer to G07 of the inrev-guidelines">Governance module.
 

The governing body of the vehicle, together with the investment manager, should ensure that there are systems and procedures to strengthen the skills, capacity and competence of employees and the governing body with regard to ESG issues.

The investment manager, together with the governing body of the vehicle, has a responsibility to assess whether the people involved in the vehicle are well-equipped and possess sufficient knowledge, skills, and experience to consider and address major ESG risks and opportunities while performing their duties.

Key members of the operational and management team, including the governing body of the vehicle, should have capacity and devote adequate time to effectively operate and oversee the ESG strategy and objectives of the vehicle. This consideration is especially important for team members that are instrumental to the success and execution of the ESG strategy of the vehicle.

The investment manager should ensure that all parties involved in the operations and management of the vehicle are adequately trained and have access to appropriate educational programmes in relation to ESG objectives of the vehicle.

It is important that all parties involved in the operations and management of the vehicle have an understanding of its strategy, objectives, and targets related to ESG considerations. This could be facilitated through training and awareness programs.

The investment manager should allocate sufficient resources for education and training. Training should cover the major considerations around ESG, including areas such as building an awareness of the impact ESG factors may have on the performance of a vehicle, its business model, and the risk management approach. Also, it should assist in identifying the primary impact the vehicle’s strategy has on the environment, society, and other stakeholders, together with its unintended consequences.
 

The investment manager should consider principles of Diversity, Equity and Inclusion (DEI) in shaping the structure and culture of its organisation, and the composition of its governing body.

The investment manager should ensure that its human resources processes and programs are impartial, fair, and provide equal possible outcomes for every individual based on merit, irrespective of identity and background.

The composition of the governing body should be based on the required skills and expertise and appropriate DEI principles.

The culture and management style of an organisation should promote effective teamwork with individuals feeling included and comfortable in contributing to problem-solving and decision-making.
 

The governing body, together with the investment manager, should define a framework for their oversight of ESG topics and their responsibilities for ESG factors in strategy-building, its implementation, and the investment process.

The governing body, together with the investment manager, should consider the following areas when defining their oversight framework and responsibilities with respect to ESG and climate-related issues and decision-making:

• The processes and frequency by which the governing body and its committees (eg, audit, risk, or other committees) are informed about ESG and climate-related issues and the process and frequency by which they review and approve the ESG strategy;
• The governing body’s role in assessing and managing specific ESG factors as they arise and their impact on investment and stakeholders;
• How the governing body and its committees ensure ESG and climate-related issues are addressed in the execution of the vehicle strategy and its ongoing operations. For example, through annual budgets, risk management programmes and the vehicle’s performance objectives, capital expenditures programmes, acquisitions and disposals.

The investment manager should establish policies and procedures to ensure that the ESG strategy and objectives are implemented considering the best interests of its investors and stakeholders.

The investment manager should include in its policies and procedures provisions to effectively mitigate the potential impact that the vehicle’s operation may have on a range of external stakeholders with respect to ESG factors. For example, such considerations should be built into the vehicle’s due diligence and decision-making processes, to minimise material adverse impacts on society, the environment and other stakeholders, alongside the relevant financial and sustainability risks.

These policies and procedures should effectively address the range of ESG factors (listed in Table 1 of ESG02). A vehicle may have different approaches to documenting its ESG policies and procedures. For example, ESG objectives could be addressed through a series of dedicated policies (eg sustainable investment policy, responsible contractor policy, climate resilience policy, conflicts of interest policy etc.) or could be embedded in relevant wider business policies (eg as a component of human resource policies or investment policy etc).

The remuneration policies for members of the governing body and for the investment manager should be consistent with the ESG strategy and relate to objectives and performance in relation to the management of ESG risks and the vehicle’s impacts on the environment and society.

The ESG policies and procedures should be practical and embedded in key business processes, such as supply chain management, building operations and development (including adaptation and mitigation activities), acquisition/divestment activities, and access to capital.
 

The investment manager should design and operate an effective system of internal controls on its ESG framework.

An effective internal control framework should be adapted to the specific risks, processes, and organisational structure supporting an investment vehicle. It should include consideration of the ESG framework of the vehicle. The investment manager may consider developing an Environmental Management System (EMS) for the vehicle and/or for its property management activities and having certified it, to the extent it is applicable.

The internal control framework should be aligned with legal and regulatory compliance functions and the overall risk management framework (for more details, see inrev-guidelines">Governance module).
 

The investment manager should identify key metrics, in order to monitor progress towards ESG objectives and annual targets, including specific climate-related outcomes, on a regular basis.

Environmental and social objectives should be measured and monitored by setting clear metrics. These indicators should be designed to measure and manage ESG risks and opportunities and be aligned to the extent possible with INREV’s list of standardised metrics typically used for real estate investments, as described in Table 1 of RG73 and Appendix 1 of the INREV sustainability reporting guidelines.

These metrics include indicators related to climate risks, energy efficiency, water consumption, waste management and biodiversity, as well as social metrics, where relevant.
 

The investment manager should define specific positions, teams and/ or committees, embedded in their management structure, to coordinate and monitor progress towards objectives that are defined within the ESG strategy.

The investment manager should define specific roles and responsibilities, embedded in their management structure, to ensure that the implementation of the ESG strategy is efficient and effective, including, but not limited to:

• Ensuring that specific ESG-related responsibilities of management-level positions or committees are well defined; and, that such management positions or committees report to the governing body or a committee of the governing body;
• Considering the identification of a dedicated ESG team or specific ESG-related responsibilities within other teams (such as valuation, risk management or compliance), with such positions empowered by and reporting to the governing body or a committee of the governing body, as appropriate;
• Setting out ESG KPIs for vehicle staff, as relevant, such as asset managers targeted to achieve overall ESG objectives. The investment manager should establish processes to set and measure these KPIs and regularly monitor employee performance against them, as well as identifying a performance evaluation process;
• Ensuring that the role and responsibilities of other parties such as key service providers are aligned with the overall vehicle ESG goals (see Appendix 3 for more information on the ESG-related roles and responsibilities in vehicle governance).

The investment manager should develop a framework to identify and track ESG-related incidents and controversies in an effective and timely manner.

In the normal course of business, a vehicle may encounter and be exposed to a wide range of ESG-related incidents and controversies such as misconduct, penalties, accidents, and breaches of codes of conduct/ ethics. The investment manager should ensure it has sufficient resources and systems to identify, monitor, and resolve such ESG- related incidents and controversies in an effective and timely manner.
 

The investment manager should ensure that, as an integral part of the investment process, adequate ESG assessments and analyses are fully embedded.

When making key decisions, such as to develop new buildings, refurbish assets, and/or buy/hold/sell assets, it is important to fully analyse and understand specific ESG factors related to the asset and how these factors were taken into account, including assessments on valuation outcomes (for more details seeproperty-valuation#inrev-guidelines"> INREV Property Valuation module). The investment manager should be confident that they have done sufficient work to confirm that a particular asset and its related asset management plan are aligned with its overall ESG strategic objectives – see Appendix 2 for a list of ESG considerations related to important components of a typical investment process.
 

The investment manager should ensure that its ongoing asset management processes are aligned with the overall ESG goals and objectives of the vehicle.

To achieve the ESG objectives of the vehicle, the investment manager should define annual plans at the asset level and set out clear ESG targets and action plans associated with the management of the asset. It is important to identify key performance indicators for the assets in order to monitor progress towards those objectives on a regular basis. The investment manager should consider the ESG KPIs set out by INREV – see Table 1 of RG73 and Appendix 1 of the INREV sustainability reporting guidelines.

The investment manager should consider an appropriate management system to collect and consolidate ESG data related to the vehicle and its underlying assets, including tenant and supply chain data.

The investment manager should also consider incorporating ESG clauses into lease agreements to support the ESG objectives. ESG clauses relate to actions such as, defining the responsibility for capital expenditure on ESG projects, sharing cost savings, sharing data and the installation of energy and water metering, making commitments that ESG factors will be considered when using contractors, etc.

The investment manager may participate in ESG assessments and/or receive ESG scores. In addition, tenant engagement strategies play an important role in implementing an ESG strategy at asset level. Tenant engagement actions may include training, regular meetings, campaigns and surveys.
 

The investment manager should build systems and processes to manage ESG impact in their supply chain.

An investment vehicle may be involved in negative ESG impacts either through its own activities and assets or as a result of indirect impacts through its supply chain.

The investment manager should consider the main drivers of any possible negative ESG impacts it might have in its supply chain and build its approach to prevent and mitigate them.

The investment manager should consider ESG factors in its due diligence in order to prevent, mitigate and address actual and potential negative impacts in the supply chain. These include negative impacts caused by the relationship with a supplier that could be directly linked to the operations, services or development of the assets.

Actions taken to address supply chain impact can include changing procurement practices and other processes and adjusting performance expectations and training, as well as terminating certain supplier relationships.

They may also include operating programs to engage with other stakeholders, such as the communities related to the operation of specific assets, to enhance performance, and identify and mitigate actual or potential negative impacts.
 

As part of the development of the vehicle’s overall risk management framework, the investment manager should ensure that ESG risks, including climate-related risks, are appropriately identified, assessed, and monitored.

The vehicle risk management framework should include a definition of relevant ESG- related risks and risk appetite. It should also define the roles, responsibilities, and controls within the risk management function which specifically mitigate those risks.

The investment manager should ensure that ESG-related risks and mitigation strategies are integrated into the investment objectives and operations of the vehicle.

See Appendix 1 for a description of ESG considerations and techniques that may be considered by risk managers.
 

The investment manager, in collaboration with the governing body of the vehicle, should define an appropriate ESG reporting framework. This framework should be clear, balanced, and fairly represent the ESG performance of the vehicle, in line with regulatory requirements, investor expectations, and its ongoing business needs. The framework should be clearly defined in the constitutional documents of the vehicle.

The investment manager, together with the governing body of the vehicle, has an obligation to ensure that all forms of reporting, including ESG reporting, are appropriate to the circumstances and include applicable regulatory and legal components. In pursuing this responsibility, the best interests of investors should always be considered. See also G31 of the inrev-guidelines">Governance module.

The investment manager should disclose relevant ESG information periodically (at a minimum on an annual basis) in a clear and concise manner. In accordance with INREV’s reporting guidelines, the investment manager should clearly define in the constitutional documents of the vehicle the content, frequency, and timing of its annual and interim ESG reporting (see also G37 of the Governance module. These should be determined in line with investor expectations and the ongoing business needs of the vehicle.

The organisation and reporting format of the vehicle’s ESG status, actions and performance may be reflected in a dedicated ESG section in annual/interim reports, integrated into relevant generic sections of those reports, or presented as a standalone sustainability report (see Reporting module).

When developing its ESG reporting framework, a broad range of ESG KPIs should be considered by the investment manager as relevant to the ESG strategy and business needs of the vehicle - see INREV ESG KPIs in Table 1 of RG73 and Appendix 1 of the INREV sustainability reporting guidelines.

In addition to respecting the regulatory and contractual reporting obligations of the vehicle, the investment manager may consider other widely recognised ESG reporting standards and frameworks. The investment manager should disclose to investors which industry frameworks were considered and adopted for ESG reporting and climate-related risk assessments (eg TCFD, WGBC ANZ, GRI, SASB, CDP, UN PRI, UN SDG (see Appendix 4)).

The investment manager should state whether the vehicle participates in ESG assessments and/or receives ESG scores (eg GRESB). Information regarding participation, outcomes/scores and future ambitions should be communicated to investors.

ESG reporting should include details on how the vehicle embeds the ESG strategy into its overall governance approach to achieve targets and the performance achieved against those targets. It should include a description of how its governance structure integrates ESG considerations into decision-making processes.

Certain legacy vehicles or funds which opt not to have a coherent ESG reporting framework should nonetheless disclose this status and provide any relevant explanations.
 

The Investment manager, together with the governing body of the vehicle, should demonstrate how they are actively engaged with and accountable to their stakeholders.

The investment manager and the governing body of the vehicle are accountable to their stakeholders for the ESG strategy and performance of the vehicle. Demonstration of this accountability could include, for example, being prepared and ready to respond to ESG- related queries, providing explanations on the ESG performance of the vehicle, or meeting with investors and other stakeholder groups to review and discuss ESG-related issues impacting the vehicle.

For more details on the accountability principle and guidelines, see the inrev-guidelines">INREV Governance module.