As reports from various international climate and governmental organizations flood the mainstream with warnings about the worsening effects of the climate crisis, it is crucial for business leaders across industries to consider approaches geared towards improving ESG performance if their business is to adapt to the changing expectations from a wide range of stakeholders. Putting the physical risks of climate change aside for a moment, companies and C-suite executives who overlook the compounding importance of ESG run the risk of deterring investors, who are increasingly conscientious about the sustainability of their investments and assets.
This is certainly the case for the real estate industry. The building and construction sectors account for an estimated 39% of all global carbon emissions; the physical assets laying the foundation for the real estate industry face a growing risk as the frequency and intensity of natural disasters increases; and some leaders in the market have shown hesitancy to the kind of rapid change and adaptation required to allay the current climate threat.
With this in mind, BREEAM recently brought together some of the brightest minds in ESG to discuss factors driving ESG investing in the real estate sector, as well as approaches for developing a strong ESG strategy in the industry. Panelists included:
Deborah Teng, ESG Program Manager at PGIM
Matt Praske, Director – Energy & Sustainability at WashREIT
Brooks Gordon, Managing Director, Head of Asset Management at W.P. Carey
While ESG may have been an emerging concept just a few years ago, it is now a developing set of criteria that any successful business must strategically consider and holistically measure, manage, and disclose performance against. Throughout the conversation, a few key considerations for developing the strongest approach to ESG improvements stood out.
- Where ESG in the real estate sector used to be entirely bottom-up focused around resident concerns and demands, changes over recent years have evolved this issue into a top-down focus centered around high-level decision-making and investor concerns/demands.
“What really is exciting about ESG as a focus is it’s one of those rare opportunities where all of our stakeholders are really aligned,” said Brooks Gordon. “When I speak of that alignment, from an investor perspective there’s clearly an imperative here from our existing investor base, as well as bringing in new investors and new sources of capital.”
Matt Praske added, “Driving [ESG] focus more recently is certainly the substantial increase in top-down pressures. Those are investor demands or requests for disclosure to show impact metrics on changes the organization is seeing. Other top-down pressures that are either active or on the forefront for us are some regulatory pressures as well, both at the local level for regulation of energy efficiency of buildings or at the federal level for financial disclosure of ESG requirements.”
2. Strategic plans for ESG goals tend to be fixated on environmental improvements, often overlooking the “S” and the “G.” For the first time, the real estate industry is clamoring for more regulation to establish consistency across the industry and actionable advice for implementing impactful social and governance changes.
“It’s interesting that the ‘E, S and G’ are together seen as a single initiative. That’s a lot of criteria; that’s a huge range of activities,” noted moderator Breana Wheeler, US Based Director of Operations for BRE. “So when we think about the environmental criteria… the ‘E’ seems fairly defined. But the social criteria — the ‘S’ part — could be supply chain management, health and safety, workforce development, and diversity and inclusion, with governance focusing on compensation, policies, etc. It’s a huge range.”
“Starting from the very beginning during acquisitions or a new development… [we incorporate] risk assessment to evaluate the physical risk, social risk, and transitional risk, which covers the ‘E, S and G’ well,” said Deborah Teng.
“It’s challenging that ESG has been unified into a single thing. In many ways, these are inextricably tied concepts, but in other ways, they’re so different. You have engineering challenges on one hand, and then social, harder to quantify ones on the other,” said Gordon.
“For me what’s the most important is — can we actually get the results in our workforce? The disclosure is important, but much more important is — do we have a diverse [and improving] workforce that has opportunity for advancement through training? The proof is in the retention pudding.”
3. When it comes to commercial real estate’s handling of ESG, Europe is ahead of the US. With this in mind, the US can look to Europe for insight and inspiration, but we need to be mindful of tailoring strategies to individual companies and markets. There is no “one size fits all” approach to ESG globally.
“[European investors] definitely move at a faster pace and they are driving our strategy, staying ahead of things like internal carbon pricing, measures to decarbonize buildings, and energy performance certificates and labels,” said Teng. “A lot of it goes back to SFDR (Sustainable Finance Disclosure Regulation) and the regulations right now, which list out a specific article that your client will be under… Based on the article you have to disclose certain measures, and that is in a sense a way to prevent greenwashing.”
“[Our discussions] with European and foreign investors can typically be a preview of the topics and trends that will be material for us a year or a couple of years in the future,” added Praske. “But at the same time, we’ve seen some benefit to this — for example, that base of knowledge coming this way was beneficial as we issued and aligned our green bond — much of the allocation of those proceeds is issued to pursue BREEAM certification — and those who came from a European background were great. We didn’t have to do education.”
With a stronger focus on ESG and achieving Net Zero than ever before, professionals across the globe and all sectors of the real estate industry must start an open conversation on goals, guidelines, and strategy. The first-hand and actionable insights of industry experts will be crucial in developing effective solutions to the climate crisis’s impact on real estate, and BREEAM is proud to remain an ardent facilitator advancing these discussions.
If you missed the panel, you can watch the full webinar here.
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You can now also register for the next webinar in our series which will be on the 18th November 2021 11am EST: Data Centers & Sustainability
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