The asset allocation of sustainable real estate: a chance for a green contribution?

Purpose - Given the growing market awareness concerning responsible investments in recent years, the purpose of this paper is to bridge the gap between real estate companies which implemented a corporate social responsibility (CSR) agenda and the possible role within a multi-asset portfolio optimisation framework. The behaviour of the asset class sustainable real estate (SRE) together with its diversification characteristics are the main focus. Design/methodology/approach - The study is an explorative empirical analysis applying a portfolio optimisation algorithm. First, the authors developed a sustainable real estate index comprehending listed real estate companies from 2004 until 2010 acting in line with a CSR agenda. Second, the authors introduced SRE into the opportunity set of an UK investor and finally, generated the theoretical optimal asset allocation of SRE within different risk-return portfolios. Findings - The unique risk-return pattern of SRE enables the asset class to be allocated across all portfolios ranging from low to high risk along the efficient frontier. In the low-risk levels, SRE behaves as a diversifier whereas in the medium-to high-risk portfolios SRE is represented as the main allocated asset. Sustainable real estate thus offers opportunities to numerous investors in view of their investment preferences and corporate strategies. Practical implications - The results could encourage institutional investors to take investments in CSR-driven listed real estate companies into account and to rethink their strategic asset allocation approach in view of the identified asset characteristics and the behaviour within a portfolio framework. Originality/value - The paper provides a first insight in the field of portfolio management by introducing SRE into the opportunity set of a UK investor. The study raises SRE to an aggregated level and delivers theoretical as well as empirical evidence of the role sustainable real estate is playing within a multi-asset portfolio.