S&P Dow Jones Indices (S&P DJI) has launched a series of new real estate index that favour real estate companies with strong track records in sustainability.
The indices provide broad exposure to property companies while tilting to those with a strong track record of sustainability performance.
The indices are an extension of the Dow Jones Select Real Estate Securities Indices (RESI) and consists of four indices covering the US, global, global ex-US, and Japanese property markets.
They are the Dow Jones US Green REIT Index, the Dow Jones Global Green RESI, the Dow Jones Global ex-US Green RESI, and the Dow Jones Japan Green RESI.
The indices seek to mitigate ESG risk by utilizing data from GRESB, an institutional-asset-owner-led non-profit organization founded to assess the ESG performance of real assets.
According to GRESB, the global property and infrastructure sectors are at the heart of the most important and far-reaching issues of our time, including urbanization, demographic change, resource constraints, environmental impacts and emerging technologies.
The organization argues that with a significant amount of global carbon emissions being driven by the construction and operation of buildings, real estate should be a particular industry of focus among ESG-conscious investors.
Each ESG index consists of real estate investment trusts (REITs) and real estate operating companies (REOCs) within the relevant regional Dow Jones Select RESI, with constituents’ market cap weights adjusted based on GRESB’s analysis of sustainability performance.
GRESB utilizes an international framework for sustainability performance and uses over 50 indicators related to energy use, greenhouse gas emissions, water, and waste.
Firms in the universe are ranked based on their GRESB rating. Companies ranked below the fiftieth percentile in sustainability will have their index weight reduced by 30% with the additional weight reallocated on a pro-rata basis to the companies ranked above the twenty-fifth percentile.
Reconstitution and rebalancing occur annually in December.
Michael Orzano, Senior Director of Global Equity Indices at S&P Dow Jones Indices, commented, “Real estate investors have historically lacked a simple tool to integrate ESG performance into their investment process. These indices close that gap by providing a solution that allows market participants to identify companies with strong sustainability performance while retaining the investment characteristics and risk profiles of our conventional real estate benchmarks.”
Sander Paul van Tongeren, Co-founder and Managing Director at GRESB, added, “GRESB exists to respond to investor demand for standardized and validated ESG performance on their real asset investments. The ESG data used for this new series of indices emerges from the GRESB Real Estate Assessment, the global standard for ESG benchmarking and reporting for the institutional real estate sector and will serve investors looking to incorporate ESG factors into their investment decisions.”
S&P DJI is not alone in offering ESG real estate indices. Rival index provider FTSE Russell unveiled a suite of green real estate indices in December 2018. The FTSE EPRA Nareit Green Index series are based on the firm’s FTSE EPRA Nareit Real Estate Indices and tilt towards energy-efficient and renewables-linked properties.