Guidelines

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.