Diófa Responding to ‘Strong Demand’ for ESG
The Budapest Business Journal talks with Zsombor Incze, head of the business development department at investment fund manager Diófa Asset Management about the impact of environmental, social, and corporate governance (ESG) and the fourth COVID wave.
BBJ: ESG is developing an ever-higher profile for businesses across the board. Why does it matter for Diófa Asset Management?
Zsombor Incze: There are quite a few aspects. We have EUR 1.5 billion in assets under management. We must consider what is best for the individual and institutional investors we serve when investing their money into businesses. There is strong business demand for ESG. Last year we launched one of the first ESG funds, accredited by BAMOSZ, the Association of Hungarian Investment Fund and Asset Management Companies. The fund turned one year old on Saturday [September 11] and is leading its peer group in terms of returns. For our flagship open-ended closed real estate fund, established in 2013, ESG was less directly important back then. Still, all of our buildings in that fund have at least the minimum green accreditation, and the portfolio includes the first LEED “Platinum” [top tier] certified building in Hungary, Greenhouse in District XIII. We have just moved into this building, which is also used for trips for university students as an example of what you can do. So, overall, I would say ESG is very important. We feel responsible for the environment and the future generations, but it is also a good topic when selling the funds. There is both a “push” and a “pull” effect.
BBJ: Does Diófa provide ESG reporting?
ZsI: When talking about Diófa Asset Management, it is important to distinguish between the company itself and the funds we manage. We are an SME with about 60 employees, and we are certainly open to those factors that give you a good ESG score. As I said, we have moved into one of the most sustainable buildings in the Budapest office scene, we do selective recycling, have digitalized most of our paper based processes, we even buy our honey from local producers to lower our carbon footprint. But we have never decided to start ESG reporting. That tends to work for much bigger companies or at the corporate group level, where they have more resources to deal with it. That does not mean there is no internal debate about corporate ESG reporting, but until now we have preferred to just do it; now we might need to consider showing others how we do it. On the other hand, since I joined Diófa in June, the main direction of product development is aimed at ESG funds. We have a good track record there and we also see a strong market demand.
BBJ: How do you think ESG will grow in significance in the coming years?
ZsI: Green financing is the most important direction in Europe. We in Hungary are slightly lagging here, but the National Bank of Hungary has launched a rather promising green program. ESG is the new market standard, although it is rather underregulated. We like to regulate things in Europe, even more so in Eastern Europe, so we will definitely see more regulation. That is probably an opportunity for those who got involved early because they have had more freedom in setting up.
ESG can be also be used as a risk management tool against vulnerabilities to climate change. A new build must score well environmentally. That is the “E” of ESG, where we concentrate most of our attention. The social factors under “S” include things like bike storage, which many stakeholders, especially tenants, want. This is a trend; more people travel to work by bike. The “G” for governance is more about regulated internal decision-making to make sure that, for example, if I say I invest my clients money into green assets, I will act accordingly, otherwise I would suffer a quite big reputational loss.
BBJ: Is ESG adherence market-driven?
ZsI: Many things you would put under the “social” section, like that example of cycle storage, are definitely market-driven. Tenants want it because their employees want it. The same applies to many elements of being a “green” building, though certainly not all of them. If you are deciding between investing in an older, cheaper builder and renovating it or a brand new, ultra-expensive office block, it is a balancing act where you have to use your best judgement. Ask a tenant whether they want the most expensive state-of-the-art environmental option or something still green but cheaper, and they will probably opt for the latter. But don’t do enough, and you risk losing tenants. In some cases, perhaps most, it is market-driven, but others require a more comprehensive answer.
BBJ: How has the 2021 business year been? Do you expect to reach pre-pandemic levels any time soon?
ZsI: The exact numbers won’t be known until next year, of course, but it has been a good year for Diófa. The pandemic has hit every business to some extent, I guess, and we are no different. We have had to renegotiate some tenant agreements, but most have stayed with us. It also helps that our buildings have gained in value, especially in the logistics sector. Our real estate funds performed really well last year; as I said, our ESG fund is best in class. The way we look at it, if our investors are happy, then we will also be happy in terms of results.
BBJ: And how do you see the market right now? Is money finding investment targets, or are we in a holding position?
ZsI: There is always room for more money in the securities market: new money coming into the funds is never a problem. Price levels are quite high, and the market seems to be expecting some pullback, but the prices keep rising, so while you have to maintain some liquidity you should also be fully invested. It is all about selecting the right assets with the right return, and our managers have a good track record in that. The ESG fund has shown it can make a nice return. The real estate funds are a little different. They always have to maintain the right liquidity profile as either buying or selling real estate takes more time than just pressing a button. We see no problems; clients like our real estate funds because of their great risk-return characteristics, but we still have to be careful, of course.
BBJ: Are you concerned about the possible effects of the fourth wave on business?
ZsI: To be honest, in the real estate market, the pandemic is already priced in. Everyone has a more favorable view of logistics now compared to, for example, shopping malls, but that will not change in the short term if we have a fourth wave, or a fifth, and so on. Real estate funds attract long-term investors with a long-term mindset and what was to be learnt from the pandemic has already learned. The securities markets, however, always react faster. There it is more the mood of the traders that determines the current pricing reaction. These decisions, though, are all balancing acts, and I think our portfolio managers are doing a great job in that respect. In these complex market scenarios, expertise matters a lot. We are prepared.
This article was first published in the Budapest Business Journal print issue of September 24, 2021.
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