On-Demand: The Real Estate Due Diligence Checklist

Amy Price:

Hello. Thank you for having me. My name is Amy Price, I'm the president of BentallGreenOak. BGO is a global investment management firm. We manage about 83 billion of assets in US, Canada, Europe, and Asia. We invest across the risk spectrum core to value add, and we have both debt and equity strategies.

LM:

Thank you very much, Amy. Heather?

Heather Fernstorm Boarder:

Hello. Nice to see everybody today. Heather Boarder, Alliance Global Advisors. We provide growth-oriented solutions for the investment management community. We were founded on April 1st, 2020, and as of today we have advised investment managers with the total AUM of about 540 billion. Looking forward to this conversation today.

LM:

Thank you very much, Heather. Jim?

Jim Farris:

Hey everybody. I'm Jim Farris, the CEO and co-founder of Mosser Capital. We're a fully vertically integrated workforce housing operator and investor based out of San Francisco, California, focused on investing and operating in California. We own and operate about 4,000 housing units and we manage approximately one and a half billion of assets under management today.

LM:

Thank you very much. Margaret?

Margaret McKnight:

Hello. I am the head of portfolio solutions for StepStone real estate. StepStone occupies an important role in the ecosystem between GPs and LPs in the private markets. Last year we conducted over 900 meetings with real estate managers and on behalf of our discretionary mandates and also with our advisory clients, we committed over $18 billion to new primary funds and also made $2 billion of investments in co-investments and secondaries, both LP and GP led recaps. We operate across the risk spectrum and we are global.

LM:

Thank you so much, Margaret. I'm going to start with you if you don't mind. Can you provide some context around what your clients are asking of your firm and to what extent does it factor into your investment decisions? How has the due diligence process changed, including the reporting part?

Margaret McKnight:

So last year Jones Lang did a survey of 600 of very large investors and occupiers globally and said that by this year 70% of them would have net zero programs and a larger percentage of that thought that climate risk was investment risk. We are an investor client driven firm, so we serve a variety of investors and I would say that our experience is very similar to the survey findings and it runs across the spectrum from Australian and European investors who by law need to factor in things like carbon emissions to all of their investment decisions in property management through I would say many of the public pension funds in the US who run the gamut and are a little more concerned actually about things like DEI that are coming up the curve on emissions.

And then at the other end of the spectrum, we're starting to see the petroleum states, in particular Texas and Oklahoma having backlash and saying that with laws in process that say you are not allowed to consider ESG when you're making investments as part of your fiduciary duty to not look at it. Whereas the folks on the other side of the spectrum think it's their fiduciary duty to look at it. I'm going to more address the bigger end of the spectrum, but there's going to be some interesting conflicts. It puts managers in a bind because what you have to do to satisfy European investors' legal requirements is now sort of not welcome in other places. So that's going to be interesting as that plays through.

In response to all of this, when we diligence investments, we have a RI scoring, responsible investment scoring that looks at do you have a policy? Do you have processes and management in place to actually execute on that policy? Are you evaluating the responsible investment implications at the investment level and do you have a plan to improve it? What's happening at the reporting level? And there's a ton of action there with a lot of new technology coming out to service these needs that I'm sure we'll get to in a bit. And then also, are there any kind of non-financial benefits that should be factored in? Most managers were scored from zero to four. Most folks score between two and three. The bigger, more sophisticated firms with more resources do a better job of coming in at four.

And you essentially have to be a TCFD signatory among other things to get to a four because what that means is you have a real plan in place that's well thought through, you have the processes and the technology and you're really doing it. So that's kind of the big picture.

LM:

Thank you so much. And Amy, I'm going to turn back to you. And as a global institutional investment manager, how are you LPs thinking about real estate due diligence and their investments?

Amy Price:

So it's an interesting question and Margaret hit on some of these tensions and as a general partner there's a little bit of that bind, but what I would say is it comes back to what's the conviction? And for us, we do have a lot of conviction around the path to net zero being a very important path to be on as an investment manager. And that conviction really comes from a place of how do we maximize value? How do we de-risk? And very focused on the financial impact, not necessarily the socially minded opportunity. So I'll just share a little bit as to what we hear from not just our investors, our LPs, but just broadly in the market and what gives us that conviction. And I'd say it comes from three directions.

So the first, as you mentioned, is LPs, it is investors. As Margaret said, a lot of the capital is prioritizing ESG in their investment strategies and priorities. So what does that mean? Most simply that is a source of capital, it's a source of liquidity and therefore impacts value. The other angle that I think is really important is our tenants. So at the end of the day, again, who occupies our buildings? It's our tenants. And this conversation is also evolving, it is shifting. As an owner, we're being asked more and more about our plan as an operator of a building toward carbon reduction. Tenants are looking to make their tenants or their employees come into the office. So what draws them in? What do they care about? And then of course there's disclosure regulation that we all see coming.

So I think from the tenant perspective, again, that's important because it drives revenues, which also creates value. And I'd say the third element is regulation and regulators. Now, again, if the first two perhaps are more the carrots, the regulators are more the stick because a lot of what they are doing is enforcing some compliance, some reduction, some measurement of carbon. So that's also driving the thought processes for us as a manager. One other comment I would just make is that from a global perspective, the US is behind other regions of the world and Europe in particular. So I think an important point of view is just how do you look around the corner?

And I think what's interesting is from the US perspective, we actually have the ability to look around the corner and see what's coming when we look to Europe, the UK, where they are definitely ahead of us and not just the innovation around this sustainable investing and carbon reduction, but also further along in how they're enforcing that and driving that change.

LM:

Well, thank you very much. And Margaret, I'm going to get back to you on turning to your opinion. Do you have anything to add based on your experience with GPs? We can talk a little bit about your biggest challenges in that area. I can-

LM:

Margaret, I think you're on mute.

Margaret McKnight: 

Trying to avoid background noise. The challenge right now, and I think I mentioned this earlier, the action is really around measurement. The European laws are pushing the envelope on this. There's a lot of practical challenges with measuring these different things. And there's a lot of new technology out to help the building owners who also have to rely on the tenants to release information to them, gather and aggregate the data in an industry where frankly, especially if you are a fund investor, we have a long way to go just on reporting the asset level data, like what do you own? What did you pay for it? And really basic things. And then we're overlaying on that, the ESG.

So it's kind of driving to me a very welcome advance in technology, but it's kind of overwhelming for all of us to figure out how to do this and with now what is turning out to be a proliferation of vendors. And hopefully we'll have more standardization. There are groups like GRESB trying to drive some of that, but even the regulators are still figuring out the rules. So it's all in transition right now.

LM:

All right, thank you. And Jim, I want to hear your views on what is Mosser's experience in navigating due diligence considerations? So in your experience, what are some effective strategies for integrating ESG or any other KPIs into the acquisition process?

Jim Farris:

Yep, thank you LM. So two different questions. I would say our experience broadly in due diligence is kind of threefold. So we're an emerging fund manager, which means we have a discretionary fund vehicle, so the level of due diligence and the focus of due diligence for that vehicle is slightly different than for a separate account vehicle as well as for a co-investment. And so because we're fully vertically integrated, we're touching every aspect of this process, we're touching the deal down to leasing the apartment, and then we're touching the investor directly from an investor relations standpoint in the fund and within those partnerships. I would say our experience is that folks are doing more and more and more and more, to Margaret's point, more and more and more and more due diligence, particularly today when there's so much uncertainty of where markets are going and when there are somewhat politicizing forces around the ESG and considerations that can be polarizing for different investors and different operators.

So I would say at each level, at the fund level, at the separate account level and at the deal level, there is a heightened focus on ESG in general. At the deal level, you're thinking about what are the rents? Are the rents affordable? Is there a deed restriction? Is there light tech financing involved or other type of government subsidy involved or deed restriction? At the strategy level, what are you doing? We invest in workforce housing, which is within the spectrum of attainable and affordable housing. And so we're lucky in the sense that we're in the sweet spot of how you can communicate that you're making an impact and you're kind of providing social good depending on the quality of work that you do in that spectrum.

And then at the fund level, you're looking more at diversity within the fund, you're looking at who are the decision makers in the investment committee? Who are senior executives at the firm? Who are an MWBE certified company, for example, so are you minority/women business entity? So there's different layers of it, but I would say everyone now has an emphasis on some level of ESG, particularly in what we're doing. And so it's really important for us to be focused on that and to figure out ways how we can measure that and articulate it at each of those levels.

LM:         

Thank you.

Jim Farris:

When it comes-

LM:

Please go on.

Jim Farris:

Just getting to the second question. How can we do that at the deal level? So going back to being fully vertically integrated. So we're lucky in the sense that we're touching every part of this process. So we're touring every unit for example, so we understand who are the tenants or who are the residents living in these homes? What's the demographic? Are we going to be serving a need that doesn't exist in our neighboring properties? How can we improve the quality of that housing relative to other housing in the area? Are we investing in a low income census strip? Are we bringing institutional capital? We have partnerships with sovereign wealth funds, we have global insurance providers that are investors in our fund. Are we bringing institutional capital to areas that historically haven't received that and oftentimes are blighted because of it?

So we measure things like that. We can measure how much capital improvement we do throughout the life cycle of a building, of an acquisition, and then we can take our underwriting model and then compare year over year. Okay, we said we were going to put in 5% of the total purchase price towards CapEx. Did we put in 5%? Did we put in 7%? Did we put in only 1%? And what were the circumstances around that? Because we're in this kind of housing element, there are lots of things that we can distinctly measure. And per our prior conversation, I was surprised there's a little bit more muddiness or murkiness on the environmental side compared to some of the stuff that we measure.

Even though we do this every day, it took us a long time to really compartmentalize all of these metrics and to really have an intentional message that we can communicate as far as how and if we're making the impact that we say we're going to.

LM:

Gotcha. Thank you very much. Heather, how can established investment managers differentiate themselves in today's marketplace?

Heather Fernstorm Boarder:

I think that's a great question and one that was addressed a little bit by my fellow panelists. So if you heard the conversation so far, Margaret touched on how the consultants and how the LPs are really looking at this from a holistic due diligence standpoint. Amy focused a little bit on the environmental piece. Jim talked about the diversity of thought and the importance of diversity of thought within leadership teams and on the organizational level. And so then if you think about the governance factor, how is one supposed to differentiate themselves between other organizations? And I think what it really comes down to is deriving a framework within your organization, but then being able to articulate that framework. And so a lot of the questions that we get Alliance is not only where do we start, but how do we move this conversation forward?

And what I'll say is that every program looks very different depending on the manager and also depending on the LP, to Margaret's earlier conversations. And every manager and every LP is in a different state within this process. But really typically when we kind of dial it back from a governance standpoint, we start with education and we start with a materiality assessment. So we believe that it's very important to bring the education on the forefront of these discussions. The education needs to be timely, it needs to be consistent, it needs to be reoccurring. That education can come from a third party provider. It can come as by way of a lunch and learn, if you will. It can come by distributing additional materials to the entire organization from the management all the way to the asset managers, to those that are on the ground, to Amy's comments, how important it is to understanding the tenant's expectations and what they're trying to achieve as well.

So from education, then we work with our clients on determining a state of a baseline. Where is the program today? Then we look at determining near-term and long-term goals, which as we talked about, were defined as KPIs. And then we put together a strategic roadmap. So this is really where I think the differentiator occurs. A lot of managers and a lot of LPs are out there talking about what they've accomplished to date, but I think what's most important is defining that roadmap forward. And we reference it as an integration plan and we encourage our managers to come to every LP discussion and every consultant discussion with a roadmap of where they are today, what their defined KPIs, objectives near term and long term, and the resources and the way in which that they're going to adhere to those objectives. And once again, we call that an integration.

Those KPIs are redefined in that integration plan and then we put a report together and that's really kind of determining the progress. So how are you reporting on those KPIs? How are you looking backwards and being able to articulate into the LPs, into the consultant community, what you've accomplished and how you've gone about accomplishing those? So once again, education, developing a baseline, coming forward with an integration plan, redefining your KPIs, and then putting a reporting framework together to report back.

LM:

Oh, thank you very much Heather. And there's a follow-up question. What tools and resources should an investment manager consider when creating ESG initiatives at the property or even portfolio levels?

Heather Fernstorm Boarder:

So this is really get really excited about our industry. We talked a lot about the discrepancies of where managers are within their process, a lot of the discrepancies on regulation and the question marks around it. But where I become very proud of our industry is this dislocation creates a lot of opportunity. And what's occurred is the industry has really stepped up in a big way and there's a lot of resources out there, not only just for the investment management community, but for the investors as well. I've been very impressed with the NCREIF PREA Reporting Standards that have been released. So there's a toolkit out there that defines standards on ESG and DE&I that was released by NCREIF and PREA last year. You have SASB, which is a sustainability accounting board. You've got GRI, Global Reporting Initiatives.

I think it was Margaret that talked about the TCFD, the task force on climate related disclosures. And how Margaret mentioned that in order to accompany that four level, that highest standard within the StepStone reporting piece, it's important to have reporting against the TCFD. You've also got a ton of data management platforms, something like a Measurabl that helps streamline the data collection. It helps kind of put together some reporting guidelines, historical and going forward. We always encourage our managers to become signatories of the UNPRI. The UNPRI really encourages more of a framework from an organizational standpoint and really kind of focuses on that diversification of thought leadership and the integration of these initiatives throughout the entire firm.

And then you've got GRESB as well as another reporting tool and toolkit that the investment managers and the investors are using. And that toolkit kind of speaks the same language between the LPs and the GPs.

LM:

Thank you so much. Anyone of the panelist wants to chime in terms of tools and toolkits to compliment?

Margaret McKnight:

I was just thinking as Heather was going through the alphabet soup of things that you need to think about on the reporting side, this is not simple. There is a learning curve and as you get more involved, it inevitably involves more and better technology as a critical piece to report and also to enact change and I think Amy could probably say some interesting things about that. But at the same time, we've heard the preponderance of investors and tenants want this. So by doing all this and getting more and more sophisticated, you open the door to more investors, you make your buildings more saleable with more evidence that there is a price differential. You make them more leaseable with more evidence that there's a rent differential depending on your category.

So I invite people to think about this climbing these hill on the learning curve and everything else. They're actually doing something that can potentially create a sustainable comparative advantage for you and your assets. StepStone has certainly turned technology into a major comparative advantage. And so we have the platform to overlay this, but it also serves other needs. So it is worth it, we think, and is where the world is going. So you kind of risk being left behind if you don't start working your way up the curve. And that will take a while. And I know Amy is way up and deep in the weeds on some of this. Maybe you could talk a little bit about what's happening with technology more at the building level.

Amy Price:

Yeah, sure. So again, just echo what's been said, right? One of the key kind of gaps or challenges that we are facing is really just access to data, access to quality data and specifically access to our tenants' usage data. And it's interesting 'cause this is actually the biggest issue is in industrial. And obviously that's a favorite asset class, everyone wants to own more of it, but it's very challenging because a lot of those are single tenant more proprietary, the way tenants utilize their warehouse and their logistics facilities. So it's a challenge. There are new metering technologies that are being implemented. So there's definitely a lot of innovation in just metering and the ability. There's also kind of advancement in green leases and more knowledge around what regulation would allow an owner of an asset to capture tenant data by regulation or by contract and a lease.

So there is advancement, but it is hard because every market and really every building has its kind of unique story. But we are definitely seeing far more solutions in terms of data analytics, both capturing data and then helping us aggregate and understand how to make decisions at a higher level. I'll just say one of the challenges though is that there really isn't one solution yet that's dominant. Again, we're a global manager, we see leaders in different regions of the world, so it's hard to start adopting and understand how you make that decision. There could be switching costs down the road. So I do think there's a bit of an impairment, but what we're doing and I would encourage others to do, is to really just test drive. To choose a few of these data solutions, to implement them in a few buildings, to work with them to see how flexible they are and how they fit your needs.

The other thing I'd just say big picture about this and just innovation is that there's a ton of venture capital actually now focused on this space, and this space being broadly new solutions that help us as an industry address our path to carbon reduction and ESG broadly. So we're seeing innovation and we're looking at how we can implement it not just in the data and the operations, but even in construction, whether that's in renovations, whether that's in new build. So again, I think we're very much early in this journey, but I think the next five years we're going to see a lot of access to materials and solutions we don't have today. So again, part of this is just kind of trying to get comfortable that it's that build the plane as you fly it. It doesn't all exist today and there's a lot that we just try as an investor, we try to be be ahead of, and again, just try to pilot and test some different solutions.

LM:

Oh, that's great. That's amazing insight. So Jim, anything that you'd like to add on this side?

Jim Farris:

Yeah, I mean, I agree with everyone. As Heather mentioned the series of governments related standards and benchmarking tools that you can use. And there are a number of ones focused on the E of ESG as well. I would say our experience on the S side, which is our main focus on the social impact side is there really hasn't been standards or benchmarks. I know that Heather mentioned a new PREA kind of standard benchmark. The first even surveys that were very institutional in nature came out a couple years ago through Ferguson Partners and PREA and NCREIF and a lot of folks participated. Was really the first survey gathering data and starting to brainstorm what benchmarks can be made, how can they be measured? And it's very touchy sensitive issues. And so it's been an interesting process thinking internally. So we've got to do a lot of our thought construction around this internally.

And really even the folks, the tools like Measurabl. Measurabl's really focused on energy usage measurement and leading GRESB data points that can roll into their report that can then mesh with a GRESB report. We went through the weeds with them on well what type of the things that we're trying to measure related to community impact and social impact and attainable housing, workforce housing, what do they have? And it was very limited. And so what we were going to have to do is create all of our own metrics, do our own analysis and put it in the placeholders within one of the Measurabl reports. And I think it's somewhat similar in the GRESB reporting right now that we basically had to come up with it. And so it's been great.

What I was going to say is as an emerging manager, it takes a lot of effort and intention and work both resources and time and just thinking through what we did several years ago and one of the panelists was involved in helping us kind of direct towards ESG as a focus. And Heather was actually consulting with us for a bit and we're putting together a fun pitch deck. We're putting together a strategy, it's all about ran stabilized workforce housing in our 50-year track record and all these great returns that we can make in this urban renovation strategy. And she kept on, "You guys should be thinking about ESG and ESG is coming." And it was interesting because that got my thought process going, and really for us it's been understanding and looking deeper at what we do and who we are.

Things like DEI, employee development, diversity and inclusion, that's Mosser. As a company that's how Mosser has been for decades, but articulating that and really understanding that and then making that an intentional message throughout the firm is different rather than just doing it. And so we formed a DEI committee, those metrics are part of our KPI reporting metrics that we developed. And now even down to the little things like what census strap are you investing in? Taking the extra step to measure all the income data that we're gathering from Measurabl, are those residents median income work? Are they middle income workers? Are they 80% AMI? Are they 60,40? Whatever it is, doing that measurement, it doesn't take a lot of work. It takes intention and it takes a process.

And I would just stress that those have been two of the most important parts of getting us from say three and a half years ago at the infant stage of being able to integrate this into practice, and now we were able to deliver our first impact report that had real KPIs that we measured against. And it was pretty cool, it was very gratifying to have that in place and be able to share that and see really, like I said earlier, a lot of it is just paying attention and thinking deeper and more intentionally about what we actually do already and then how do we measure and articulate that? And if you're in our space it's fairly straightforward, but for other managers and other product types I would just suggest thinking deeper about those considerations. Even industrial, what's your impact on the community even?

With all the traffic or all the whatever it is, just trying to think out of the normal box that you're typically thinking about when you're developing your investment strategy and seeing how you can layer any component of ESG on top of that is going to help. It's going to help you attract capital, it's going to potentially help you get better returns. And I would add as far as technologies, I said we did a deep dive for Measurabl, we have committed to use Measurabl even though we basically have to build it within ourselves, but it's a nice tool and report that we can add onto. And it also layers in some of the incremental energy saving processes that we have, so we do everything on an incremental basis around energy. We use access. And I would say a lot of the technology that's been available to us as real estate operators at this point it's really tech enabled applications.

It's not real deep technology, it's software applications that like we've talked about, can gather data, and I'm very excited about the potential of AI and how much that can continue to help, not only with gathering and processing and developing. I mean, if you think about a machine could help you develop your ESG strategy better, not only your investment strategy but your ESG strategy. So I'm excited about those. We use applications that increase access for residents like the guarantors. We work with a company named Esusu who does credit reporting for tenants, and enables them to have a credit history and then be able to qualify for a first home. And they also have a philanthropic arm related to their firm where they'll actually pay for bad debt or late rent that isn't affordable or that can be paid back, but that can step in for the tenant and then charge to the operator, which was amazing. So we love that stuff.

We use Pulse is another one. I'm sure Amy if you guys use the Yardi, you guys use Pulse. It measures all your energy usage. And we started a pilot program... And I'll stop in a second. We started a pilot program with San Francisco Utility District where we get automated alerts for leaks throughout all of our buildings, which is amazing because troubleshooting leaks and underneath [inaudible 00:35:27] of apartment buildings is a nightmare. So they've developed a technology where we can save water by detecting leak quicker. [inaudible 00:35:35].

LM:

Interesting. All right, thank you so much Jim. In the full circle Heather, I'm going to get back to you and ask as an institutional investors as they are considering or beginning to consider to develop ESG goals of their own, how do they work with existing GPs in their portfolio that may not have these ESG initiatives supporting these goals? How does that work?

Heather Fernstorm Boarder:

I go back to the education piece. So I would say that as a GP I would lean on the investor community and the consultant community and ask them to educate the investment manager community on the LPs, on the consultant's goals around the ESG and DE&I initiatives. As Margaret mentioned earlier on the conversation, there's some bifurcation within our industry, there's some differentiators and goals and objectives among the investor community. And so I think it's really the investment manager's responsibility to understand the investor's goals and objectives. I also think that it's the investor's responsibility to be able to articulate those goals and objectives to the investment manger community. And even though the dislocation occurs, I think that you're able to find a common gap and be able to bridge the gap, I should say, by way of education and by way of conversation and by way of communicating your near term and long-term goals and objectives.

So hopefully that's helpful. I think once again, it goes back to the framework, it goes back to the implementation plan, it goes back to being able to articulate where you are and where you're going. As Margaret was speaking about the scoring piece, and as Jim was articulating the roadmap and the way in which his organization went about obtaining their KPIs and obtaining their framework forward, it can become cumbersome to the manager. It can become overwhelming at times, but what I would say is that what we found with all our investment managers, and I'm sure it's very similar to the investor community as well, is there's a lot that's already established there and that's already embedded within the DNA of the organization. And as Jim was explaining his story, you'll see that I was smiling and giggling a little bit because they were already doing so much on an organizational level, and all he really had to do was put some intentionality and put a framework around it.

And you'll see that there was a momentum that built up there and now he's very much excited about the education, he's excited about being on the forefront of technology and implementation with his organization and be able to articulate that back to the investor community.

LM:

Excellent.

Amy Price:

So LM, if I can just jump in and-

LM:

Absolutely. Please.

Amy Price:

So I think Heather, where you started is really important that communication and for GPS and LPs to both understand what the other is looking for. I would just say from a GP perspective, there's a firm overlay to this. We as BGO have a commitment, if you will, and a view on the value of sustainable investing, but the way that actually gets implemented is very different by strategy and product and a lot of that does go to what our investors want. So for example, if we have a separate account or a direct relationship with one investor, it is very targeted to that investor's goal and prioritization. When it's a commingled fund, it's very challenging 'cause you're really trying to understand disparate priorities and points of view. But we definitely don't see, and it's not a one size fits all, so we have established 2030 net zero targets and interim targets for our core funds in the US and Canada, but we haven't done it in other parts of the world.

And a part of that is where we have conviction of where we can take a portfolio and generate good returns for our investors, but it also has to go with investor or LP sentiment and interest.

LM:

Thank you Amy. Anyone, Margaret, Jim, want to chime in?

Margaret McKnight:

You asked about how this happens where it doesn't already exist, and I would say a couple of different things came to mind. We cannot get hired with a flip book that has a first page that's all white men. It just doesn't fly anymore in today's world. And that's leadership, that's not, oh, we have an IR person that's a woman kind of thing. There was a very big caution on the side of investors around greenwashing, and they want to see that the stuff is real. I would also say this is why we score when we go into new funds, and we engage with the fund managers around the criteria that I listed earlier and communicate that that matters. And for many of our investors, they won't go forward without that evaluation. And I will also say, informally we have noticed a correlation between the overall quality of the management, which relates directly to the track record, and where you score on this thing.

I did mention that it's really the biggest firms that occupy the top part because that takes a lot of resources. Most of everybody else is in the two or three zone and we do go out to a decimal point, so it's not that simple. But the better managed, more proactive, more forward looking firms that have better track records do tend to land higher up in the twos and threes, and the folks that land in the ones usually have other big red flags. So this is part of a comprehensive look at the organization. So that's addressing the fund level, but also we partner for secondaries GP led recapitalizations and co-investments. We have a lot of influence on what happens and we go in with the plan, and it's across the board of how to move that data forward and get better outcomes on all of these things because we think that it actually translates into better track record.

LM:

Excellent. Jim, any remarks here?

Jim Farris:

I mean, as far as I think the comment on greenwashing, I would say that if you're going to articulate a vision and a plan, you have to follow through with it or else you're going to lose credibility. So whether that's on the E side, G side or S side. So I think it's just a lot of it is follow through, intention follow through, and then as was articulated by everyone, having a clear plan and framework and then doing what you say you're going to do. It's like how you're going to invest, you're going to do what you say you're going to do. So it's another layer of that perspective on what you're going to do in regards to ESG if you're going to do anything. And there are plenty of good managers that don't do anything, but if you are going to then it's the follow through and then being able to articulate how you did and measure that.

LM:

All right. Thank you all. I would like to bring the discussion now towards return on investment, which is something that the investors are of course looking forward to increasing and then having. So let's go around the horn, and I would like each of you, each and every one of you share one or two things that your firm is doing to stay in front of these trends that we've discussed so far to boost your ROI. So what have you been doing in terms of return on investment, applying all the ESG, D&I, all the other things that we discussed so far? I'll start with Jim. Jim, maybe we can kick off with you.

Jim Farris:

So I would say, as I mentioned before it's forced us to look deeper at the data and to be more granular and to understand income levels and neighborhoods, even on a block by block basis, even better than we already did. So from that perspective just having that better understanding of what it is and what you're investing in and what's the potential that you are going to improve an asset and the relative value? So it just forces us to look deeper. We didn't look as far into resident income in the past, so that's been helpful. And then really it's creating some of those barriers to entry as far as just differentiating ourselves. And if there's less competitors by nature of supply and demand, less competitors doing what you are doing specifically, you're going to potentially get a higher ROI this way.

LM:

That's right. Amy?

Amy Price:

I've already spoken some to sustainability so I'll take a slightly different tact to just add something different, at least what BGO is doing. So you talk about boosting ROI or I would say more broadly performance, I think a part of this is for us as an investment manager, our performance is really the strength of our team and our people. So how do we attract and retain the best talent? And I think that what that takes today and what the younger generation of our workforce is looking for is just very different, and I think priorities that align with this conversation are really interesting. So number one, they want to feel that there's impact. So this ability for real estate to be part of a conversation around impacting issues such as housing attainment and climate change is really powerful, but they also want to be part of a more inclusive place to work. They want to work in a more I'd say diverse environment than many of us probably that came up through ranks really prioritized.

 So building on that, what are we as BGO doing to try to continue to evolve and have a more inclusive place to work and a more diverse workplace? A couple of things. One, going back to comments that have already been said, it really is about data and measurement. We feel like it's important to also apply that to the spectrum of EDI so we do have targets for our hiring, for our promotions, for our retention. We look at that, it's just a way to measure how are we doing? So that's number one. And then number two, in terms of just more culturally what are we doing to try to keep creating a more inclusive and equitable environment? We rely a lot on employee resource groups. So we have different ERGs within BGO focused on women, LGBTQ+, Black professionals and Asian professionals because for us those are our underrepresented groups and the content's very powerful.

There's a lot of engagement and a lot of support for the learning that comes from the ERGs. So for us it's been a really powerful way to just keep building inclusive culture, but also educating those who aren't part of those communities about what it feels like from within the community.

LM:

Oh, that's excellent. That's a very nice point of view. Margaret?

Margaret McKnight:

ERGs are fabulous. I actually lead the one in our company that's focused on parents with special needs kids, and it's enabled me to meet people across the company and build relationships that have actually been really useful on a business sense apart from bonding around having different needs. So StepStone works across private equity, infrastructure, private debt and real estate, and some of those asset classes are further ahead than real estate in dealing with these issues. And we have a responsible investing effort that is staffed with leadership that works across and is integrated in all four of those, and really works to bring across the best practices and that is pulling real estate forward. And we do, for example, we're doing right now an annual survey, one of the many that we know we bombard GPs with, and it includes asking about carbon emissions and people we realized could not answer this question.

So we are now partnered with a vendor who will provide free to the GP an initial measurement of their carbon impact. So get them started down the path to be able to answer these questions. And we are also taking that all the way down to where we're directly involved at the deal level. We work closely with the GPs to figure out what they need to actually improve at the property level, whether it's how they water the golf course or what's going on with the HVAC and also help them provide. And in those investments where we go in we will pay for getting these carbon impact assessments because this is all about getting ROI and you have to start with measurement. And we're trying to get people, GPs particularly on the path to doing the first step of figuring out where we are so that we can actually make sure that we're delivering over time improved outcomes to investors in all metrics.

LM:

Thank you. And finally Heather, your views?

Heather Fernstorm Boarder:

I think when I think of Alliance and the ROI on the efforts of Alliance, we created Alliance really to push the GP community forward by a way of best practices in education. So that's really where our focus point is in ROI for the industry itself, the ROI for the investment management community. I've spoken a lot about education here, but we provide a lot of education to the LPs as well. So we have provided several educational forums to investors as such alike where we've sat in on the investment teams and provided a forum of conversation education around ESG and DE&I, where it's been, where it's headed. In addition, we are incorporating a lot of education around the universities around the United States at this point in time. So I'd say at any given week Alliance is in communication presenting to various universities.

And that was to Amy's point, is the talent that is coming in today has very different goals and objectives than it did years ago in the way in which we formulated our career. And so the succession planning element of the investors as well. Once those succession plans are incorporated and there's a new regime of leadership, there's going to be different goals and objectives within those leadership teams as well. And so we think once again, by way of educating, by way of having the means of communication and pushing best practices forward, that's really where we're going to see some differentiators within our industry. As I mentioned the alphabet soup earlier in this conversation, we're working with all of our managers to advise them on what tools are best used for their organization so isn't so overwhelming. We're helping them determine a framework, KPIs and reporting elements so that they can move all of these objectives along.

Amy and Margaret talked about different surveys within our industry, very similar Alliance is paired on numerous of these surveys to help push DE&I objectives forward to incorporate the measurement aspect and the reporting aspect among the industry. And then I'd say the other way in which Alliance very much is focused on the ROI within the industry is we're pushing our investment managers to really get involved. So I sit on the PREA governance committee, we push our community to be more involved, to sit on the communities, to have open discussion, to speak with their peer group, to make this the forefront of conversations, and to make sure that it's integrated throughout the entire organization. So I would say three or four years ago it would be very common to have an ESG committee and you would look at the framework of the organization and the ESG committee would be on the side right within the org chart. And now this is very much embedded throughout the entire organization.

The decision makers of the firm, the investment committee members of the firm need to make sure that they're integrated within those committee assignments as well. And the thought leadership needs to be very diversified in nature, and the entire piece and all of this communication needs to be integrated within our industry. And I think that we are moving that forward once again by way of communication and education.

LM:

All right. Thank you so much. Oh, those have been great insights from all of you. And it is clear that each and every one of you are at the forefront of this new era of due diligence. You're all anticipating and influencing where the industry is headed. So in the last few minutes that we have, we have five minutes, please quickly, can each of you share one call to action for our audience? I'll start this time with Heather. Heather, I'll continue with you.

Heather Fernstorm Boarder:

I think my call to action was probably discussed a little bit earlier, get involved. Don't be hesitant. We always explain to our managers that the conversation needs to take place. Don't be overwhelmed by a starting point. There's a lot that you're probably already embedded within your culture and organization that we just need to pull forward and create a framework around it. So my call to action is get involved, talk about the opportunity that presents itself. Don't be overwhelmed by the scoring metrics today. If you don't get started, unfortunately not only are you not going to be able to compete, but you're really not even going to be able to play in this game.

LM:

Oh yeah, absolutely. Margaret.

Margaret McKnight:

I 100% echo this is a new reality that we all have to deal with. And if you're struggling, get help. Whether it's somebody like Alliance who's going to comprehensively look at everything, or whether it's there are firms that will just help you figure out the technology side of it. Think about what you need and figure out how to get it done. And most importantly, look at it as a potential to create a real comparative advantage for your organization.

LM:

Thank you, Margaret. Amy, your final remarks?

Amy Price:

Well, I'm going to maybe give two. So in the vein of the S of ESG social and EDI specifically, my call to action for everyone is just have one uncomfortable conversation that you might not have had before. Because I think that just having that conversation, whatever that's about for you, opens a door and a line of communication and everyone can do that. As it relates to the E and the environmental side, my call to action is a bit more tactical, but it is at every investment committee just spend five minutes talking about climate risk, ESG, and how it relates to the investment. It can be cursory, it can be more sophisticated, but I just think it should be in every investment committee conversation for a few minutes.

LM:

And finally, Jim.

Jim Farris:

Yeah, thank you LM. And I just say it's been a fascinating panel and really, really interesting. And my call to action is to the investor community, really to commit capital, to invest capital in diverse GPs, to invest capital in strategies that are focused on energy savings and social impact. And the way you're going to attract more GPs to do it, the more capital is going towards that. And I would say it's being proven out that there is a higher ROI associated with it, but there is some risk politically in doing things different than they have. But there are leaders out there that I know that have the ability to do it, and that's what they need to do. I would say on the GP side, it is well worth the effort to figure out in any way you can to apply an ESG strategy to what you do. If it doesn't have anything to do with the investment strategy, then look within your firm and think about DEI, think about how you can impact the communities that you office in potentially.

So I think it's very much worth the effort, and reach out to folks as mentioned. There are experts on this panel who can help and other peers in the industry and you don't have to figure it out yourself. So thank you.

LM:

Thank you so much. That was amazing discussions, great takeaways and ideas, and I hope the audience was also motivated to figure out what's the best next step for their business. So I hope today's session helped to address some of your concerns and shed light on what's next for this industry. Thank you very much, and I'll send it over to Astrid. Thank you.

^{Transcribed by Rev.com}