Decomposing the Value Effects of Sustainable Investment: International Evidence

Abstract

While some evidence exists on the benefits of sustainable investment for publicly traded real estate firms, little is known as to how such benefits materialize within the firm, especially on an international scale. We decompose the effects of sustainable investment on the value and performance of listed real estate investment firms across countries with and without mandatory environmental reporting on investment properties. In the US, a country without requisite reporting, we find that REITs with a more sustainable portfolio experience higher rental income, higher operating expenses, and lower interest expenses, increasing cash flows available for distribution to shareholders. These firms also carry lower systematic risk, are subject to less uninformed trading, and attract higher premiums to NAV. We find less nuanced results for real estate investment firms in the UK, which face mandatory environmental reporting. Our findings suggest that environmental reporting requirements may facilitate improvements in the environmental performance of properties and enhance transparency.