Quantifying "green alpha"

Green alpha is a relatively new concept but is quickly becoming a critical metric for investors in sustainable property. Green alpha quantifies what proportion of total ungeared differential returns from an individual asset investment can be attributed to sustainability and energy efficiency initiatives. In this article, we explore how green alpha can be derived from reviewing environmental financial performance at individual asset level using robust data.

While sustainability specialists have been talking about this concept for some time, to date its quantum has been based on anecdotes and estimates. A robust, quantitative, replicable methodology has proved elusive. This measurement of excess returns from sustainability led asset management has been a Holy Grail for investors in this rapidly growing asset class. Investors want to know what percentage of a delivered total return has been generated from enhanced sustainability, and how to estimate it in future returns in a predictive modelling tool.

Our experience for the core plus assets that we have assessed has shown that approximately 10-15% of the total ungeared differential return is attributable to green alpha. This percentage is likely to be greater for value add strategies where there is a greater level of capex involved in retrofitting older buildings to meet exacting sustainability standards.