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SUSM650 Sustainable Finance

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SUSM650 Sustainable Finance

5 Downloads8 Pages / 1,768 Words

Course Code: SUSM650
University: University Of Waterloo

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Country: Canada

Questions:
1.Evaluate a green REIT, briefly describing its activity, its financing model, government programs and/or regulations it uses to complement its financial performance, the metrics used to measure its environmental/social impact, the expected impact of environmental/social criteria on the financial performance, and information on the actual financial performance of the REIT.2.Critically analyze an Asian impact investing fund, briefly describing its operating model, the financial model (below-market and/or market-based returns), the metrics used to measure environmental/social impact, and the financial performance of the fund against benchmarks.
Answers:
Introduction:
Green real estate investment trust is a trust that is intended to promote development of green buildings by making investment in a sustainable and efficient way. The scope of expanding the business sustainability is developed through certified buildings. The financial and operational performance of Green real estate investment trust is impacted by green buildings (Anderson et al. 2015). However, different set of results will be yielded by different measure of greenness of property portfolio of REIT.
Discussion:
Requirement 1:
Evaluation of Green Real Estate investment Trusts:
Investors make investment in green real estate investment trusts as it provides them with valuable opportunities to participate in real estate and construction projects intended to improve living standard of society. Some other reasons associated with the investment in such trusts are because of its potential for inflation and hedging, increasing diversification of portfolio and its value. Such investment trusts are involved in carrying out designing, building and providing consult services across the region relating to various green projects. Certifications of green buildings have increased due to its increased promotion which depicts that efficiency of industry in managing its energy, water and resources. Property performance and risks mitigation of green real investment trusts has enhanced by the incorporation of transparency into the sustainability performance of real estate portfolio (Busch et al. 2016).
Financial model of Green REIT:
Financial model used for dealing with properties considers time as crucial factor with the model itself being granular. As against the normal business, property management requires higher findings with different financing method because capitalization of interest rate is done under the property construction.
Green Real estate investment trust requires the financial model to make the estimation of present value of future cash flow generated by property in an accurate manner. Real estate investment trusts employed generally two types of financial models comprising of relative pricing model and net asset value model. In event of estimating the net asset value of property, model of net asset value is applicable. It is regarded as the most intrinsic methodology for valuing real investment properties. Relative pricing model on other hand helps in determination of whether the property is overpriced or under priced and within each property sector, there are equal number of buy rated and sell rated stocks (Rodin and Brandenburg 2014). In addition to this, there are green street analytical tools that help investors in making assessment of overall allocation of property.
Metrics for measuring the social and environmental impact of REIT:
There are some key valuation metrics that is used by REIT to base their investment decisions. Such metrics involve adjusted funds from operation and funds from operation. Two instrumental variables such as locational greenness and environmental government policies are used for measuring financial performance of such trust. Financial performance of such trust is well aligned with the sustainability and environmental performance through lower operational costs and reduced risk of portfolio (Kerscher and Schäfers 2015).  When determining the impact of energy efficiency and effect of sustainability on financial performance of real estate, it is required t conduct investigation at asset level.
Actual financial performance of REIT:
Investigation of sustainability of financial performance of Green Real estate Investment is done at asset level. Interplay between cost and benefits are the real outcome of performance from investing in green properties. Cost of operations and extent of portfolio risks influence the financial performance of trusts. When determining the financial performance of Green Real estate Investment, it is considered essential to address some questions such as whether property investors benefits from investing in greenness. Market of real estate is characterized as monopolistic competition where the focus of entities is on generating healthy level of profits and producing green market. There would be supplementary benefits of corporate governance by investment in energy efficiency and corporate sustainability. Due to lower energy consumption and lower market risks attributable from low exposure to energy price shocks by energy efficient properties (Clarkin and Cangioni 2016).
Requirement 2:
Analysis of Asian impact investing fund:
Investors make investment in impact investing funds by way of buying shares of organization creating positive impact on society and environment and have consequential business strategies. The potential policy for exploring the impact investment arises due to innovative financial mechanism, funds requirement and consideration of environment and social dimension by investors along with need of such funds to be delivered at large. Investors can make impact investment by way of making investment in several assets class comprising of bond, equities and real estate. They make investment in bonds for financing or refinancing of products and there is no universal acceptance of conventions for bond acceleration. Investment in real estate is also done in the form of impact real estate fund that requires setting of parameters in the form of special purpose such as school, green building and social housing (Korngold 2015).
Lotus funds is one of the Asian impact investing funds that endeavors facilitation of a diverse network, shared learning of business experience and a practice that would spur a diverse and robust network impacting the business. It is the first aboriginal impact investing fund that targets social entrepreneurship. Lotus impact fund is regional social impact fund that target small and medium enterprises to generate sustainable employment and income by providing solutions to further their social and environmental value. There are two components involves in impact investing funds that is incubator and venture capital. Venture funds provide seeds and series A of amount USD $ 25 million funds. Incubator on other hand emphasizes on early stage companies that create high social impact and commercially sustainable investment in a strategic way. In addition to this, Lotus impact is active in areas of regional network of local and foreign angel investors making investment in social enterprise and thereby contributing to ecosystem building across region. Lotus impact performs incubator service helps in accelerating social enterprise building by creating institutional financing (Lieser and Groh 2014).
Lotus impact financial model:
Financial model of Lotus funs helps investors to arrive at fair value funds by accounting for both financial data and data relating to sustainability. The fact that there is no trade off between financial and social return forms the basis of financial model. Such model helps in transformation of business fundamental paradigm into feasible investment strategy creating value (Iris.thegiin.org 2018). There has been found to have a positive relationship between environmental aspects and financial return.
Lotus impact operating model:
Lotus is an impact fund and venture builder that helps in building resources and robs of network solutions by partnering with ecosystem that contributes to take deep root by organization. Such collaboration helps in gaining an in depth understanding of growth development of enterprises that contributes development of seeds by setting stage (Janda et al. 2016).
Metrics for measurement of social and environment impact of funds:
Social and environmental impact of Lotus fund is measured by integration of IRIS metrics into the management system and social and environmental performances. Water resource management, conservation of bio diversity, conservation of natural resources, waste management and prevention of pollution are some of the environmental metrics that helps the fund in categorization of environmental impact objective using a standardized format (Brandstetter and Lehner 2015).
Social performance of fund is measured by identification of social metrics such as agricultural productivity, health improvement, capacity building, human rights protection, access to water and sanitation, growth in productivity, access to sanitation, access to energy and equality and empowerment. Such metrics are encouraged to be incorporated by IRIUS for measuring the environment as well as social performance so that several impacts, outcome and income generated helps in providing supportive details (lotusimpact 2018).  
Lotus funds financial performance:
The growth of Lotus funds are perceived to be continued as large part of investments in stock by fund managers and it does not intend to short term investors. In order to make investment in single stock, there are certain themes for making investment. Investors of Asia would be making investment in absolute return funds as there will be spiky decline in equity market of Asia. Despite the fact that Asia market is characterized by high volatility, Lotus funds provide interesting investment opportunities to investors. There is no guarantee provided on fluctuations of value of investment that is made in funds and that such investment will generate higher average return (Bhattacharya et al. 2015).

Performance (€ 1000)

2013

2012

2011

2010

Asset at year end

3.3%

5.2%

-13.85%

16.64%

Profit

8920

9196

9561

14527

Expense

572

1023

-1682

2261

Total Expense ratio

3.09%

3.06%

2.52%

2.30%

Conclusion:
The report prepared gives a critical analysis of real estate investment trust and Asian impact investing funds. Investment in such properties helps in maximization of value of real estate assets by aligning with environmental sustainability. For such investment, sustainability is the main agenda that helps in benefitting the investors as well as environment. Moreover, analysis of impact investing market depicts that investors have the opportunities for investing by aligning their objectives and unique goals.
References list:
Anderson, R.I., Benefield, J.D. and Hurst, M.E., 2015. Property-type diversification and REIT performance: an analysis of operating performance and abnormal returns. Journal of Economics and Finance, 39(1), pp.48-74.
Bhattacharya, A., Oppenheim, J. and Stern, N., 2015. Driving sustainable development through better infrastructure: Key elements of a transformation program. Brookings Global Working Paper Series.
Brandstetter, L. and Lehner, O.M., 2015. Opening the market for impact investments: The need for adapted portfolio tools. Entrepreneurship Research Journal, 5(2), pp.87-107.
Busch, T., Bauer, R. and Orlitzky, M., 2016. Sustainable development and financial markets: Old paths and new avenues. Business & Society, 55(3), pp.303-329.
Clarkin, J.E. and Cangioni, C.L., 2016. Impact investing: A primer and review of the literature. Entrepreneurship Research Journal, 6(2), pp.135-173.
Iris.thegiin.org. (2018). IRIS Metrics | IRIS. [online] Available at: https://iris.thegiin.org/metrics [Accessed 10 Aug. 2018].
Janda, K.B., Bright, S., Patrick, J., Wilkinson, S. and Dixon, T.J., 2016. The evolution of green leases: towards inter-organizational environmental governance. Building Research & Information, 44(5-6), pp.660-674.
Kerscher, A.N. and Schäfers, W., 2015. Corporate social responsibility and the market valuation of listed real estate investment companies. Zeitschrift für Immobilienökonomie, 1(2), pp.117-143.
Korngold, G., 2015. Real estate transactions: cases and materials on land transfer, development and finance. West Academic.
Lieser, K. and Groh, A.P., 2014. The determinants of international commercial real estate investment. The Journal of Real Estate Finance and Economics, 48(4), pp.611-659.
lotusimpact. (2018). Lotus Fund | About. [online] Available at: https://www.lotusimpact.com/about [Accessed 10 Aug. 2018].
Rodin, J. and Brandenburg, M., 2014. The power of impact investing: Putting markets to work for profit and global good. Wharton Digital Press

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