Long-term Return-on-Investment for You and Our Planet: Incorporating ESG into CRE Investments
ESG is a business concept which can be traced back to a UN initiative launched by Kofi Anan in the early 2000s. The goal of the initiative was to integrate principles of environmental, social and governance responsibilities into the world of investment, and given that over $20 trillion of AUM are considered to be ESG compatible, it is fair to say that the initiative has been vastly successful.
It is not without its naysayers though: there is a growing school of thought that companies sign up to ESG principles nominally but make no real changes. Putting that debate aside, there is certainly much that is positive in engaging the corporate world in considering their wider impact, and the ways in which changing corporate policy can be a banner for improving the world.
ESG and commercial real estate
The principles of ESG affect the CRE market in several ways:
There are the individual elements of Environmental issues, Social issues and Governance issues. There is also the overall concept, which attracts investors and therefore is becoming a key element to proving an attractive investment proposition. Forbes has gone as far as to suggest that in a post-Covid world, incorporating ESG into commercial real estate has become more important and will be part of a survival strategy for long-term recovery.
“So, what does this mean for the world of CRE? The industry is on the precipice of a digital transformation as the convergence of ESG, new administration, occupant needs and market demands presents an ideal opportunity for CRE to prioritize the “E” in ESG as an integral driver of economic recovery and long-term portfolio value.”
Breaking down the individual elements
Let’s have a look at how each of the different components of ESG affect the CRE market and the ways in which they each benefit both investors and the world around them.
Environmental: There has been an increase in the number of corporate tenants preferring or even insisting on “green” solutions for their workspace. Smart technology has become the norm, offering savings in energy use and cost. Other innovations include solar cells for providing renewable energy, rainwater and greywater recycling, motion sensors to control light and temperature, and working towards a zero emissions footprint. Given the chaotic nature of working life since COVID-19 began, tenants are also expecting hot-desk technology, enabling flexible working conditions for employees. Understandably, one of the most requested environmental technologies is advanced air filtration, which gives tenants peace-of-mind when working indoors. Contingency planning is also becoming more popular, allowing for continuity of services even during a crisis.
Social: The social criteria of ESG includes the impact your business has on the wider community. When a large percentage of corporations sign up to ESG social initiatives, it creates a huge momentum for change and benefits everyone, which is why so much emphasis has been placed on it by the UN. Some examples on the community level include benevolent activities such as pledging a certain number of employee days for local voluntary projects or making donations to local charities. This is often considered a business best-practice as it cements good relations with the community in which your business is based. When it comes to social initiatives on a wider scale, this involves concepts such as human rights, addressing the wage gap across classes, diversity initiatives and providing opportunities for education and personal growth for employees. The bottom line is that when it comes to the “social” element of ESG, your business makes the world a better place in some way.
Governance: Due to the prevalence of environmental and social issues within the media, the governance element of ESG is often sidelined, but it is also important when creating a sustainable and equitable workspace. Governance covers the structure and running of a company, including compliance with local laws. Among the areas covered by governance are the issues of gender equality both in representation and pay grade, ethnic diversity and employment opportunities for those of different abilities. One area which has become more popular since COVID-19 is that of mental health and creating a workplace which honors the challenges faced by employees, whether from stress or anxiety caused by work, or from managing a work-life balance, or because of pre-existing mental health issues.
Making it Yours
Your CRE business may already be signed-up to ESG initiatives, or you may already have some of these elements in place. There are several options for external evaluation so you can become ESG-compliant certified. The list includes two geared specifically for the CRE industry such as the Comprehensive Assessment System for Built Environment Efficiency (CASBEE), established by the Institute for Building Environment and Energy Conservation. CASBEE provides an evaluation of the environmental efficiency of buildings. Leadership in Energy and Environmental Design (LEED), from the U.S. Green Building Council, provides certification both for individuals and for companies, as well as for the buildings themselves.
If you are interested in improving your ESG rating, or incorporating some of the principles into your business, there are some simple steps you can take to get started:
- Research – decide which initiatives are relevant to your company, and which are realistic.
- Set your ESG goals – put a roadmap in place for your company to reach your ESG goals within your chosen timeframe.
- Decide on a budget and team for your ESG initiatives.
- Evaluate your progress – check back with your original plan, and change it according to your progress over time.
- Consider applying for certification as an ESG-compliant company.
The rise of ESG in the wider business world has definitely been reflected in the real estate market and is will certainly continue to be an important part of the future of CRE.
When it comes to embracing the future, Okapi is already ahead of the game, with a risk-assessment platform utilizing cutting-edge augmented intelligence technology.
If you’d like to schedule a demonstration, please email our sales team at –[email protected]