Introduction

This report examines how ESG performance, measured by GRESB scores, influences returns of Asia-Pacific non-listed real estate funds using ANREV and GRESB data (2010–2023). ESG integration is increasingly important for investors, though evaluating its financial impact remains complex. Findings indicate a nuanced relationship, with governance factors more consistently linked to returns than overall ESG improvements.

Evolution of sustainability benchmark scores

GRESB participation and scores have increased significantly, with average scores rising from ~50 to ~84. Improvements have been strongest in governance and policy (management scores), while performance-related metrics (implementation) have progressed more slowly. Larger managers and funds tend to achieve higher scores due to greater resources and access to information, indicating structural advantages in ESG benchmarking.

Insights in the GRESB participation process

Participation has expanded to most tracked funds, with early adopters typically large, open-end, core, and specialised funds. Early participants are significantly larger—up to 8.5 times the size of non-participants. Participation timing reflects fund characteristics rather than randomness. Early participants show higher returns (~90 basis points annually) than later entrants, though differences cannot be solely attributed to ESG participation due to underlying structural factors.

Understanding the link between fund returns and ESG scores

A positive relationship exists between GRESB scores and fund returns across investment styles, particularly for core funds. Larger, low-leverage, single-country, and sector-focused funds tend to outperform and achieve higher ESG scores. However, non-core funds deliver higher returns overall due to higher risk. ESG improvements become harder at higher score levels, and the relationship between ESG and returns varies across segments, requiring controlled analysis.

Main drivers of fund return and sensitivities to GRESB scores

Regression analysis shows market returns, lagged returns, and sector specialisation as strong positive drivers, while high leverage (especially >60% LTV) negatively affects performance. ESG participation has a small positive but statistically insignificant effect (~10 basis points). Management and governance scores show significant positive relationships with returns, suggesting strong organisational practices enhance performance. Total ESG score improvements have limited statistical impact, particularly above score thresholds of 90.

Conclusions and implications

ESG participation is associated with better performance indicators, but causality is not definitive. Higher ESG scores—particularly governance and management—signal stronger organisational control and are linked to improved returns. Key return drivers remain size, specialisation, and leverage. GRESB data provides useful insight for investors, though ESG improvements alone do not guarantee enhanced performance.