Conscious Capitalism; Stakeholder Model; Triple Bottom Line; Doing Well by Doing Good—These are all different ways of saying the same things. It is not only the right thing for companies to focus on more than profits; it is actually good for business!
It is important to view the focus on ESG, not as a “bolt on” activity or to “check the list,” but rather as an integral way to how we operate in the real estate business.
We all know that in real estate, people and capital are two key factors. It is becoming clear that both people (our internal teams, our customers, and our communities) and capital (our investors) have a heightened focus on how we do business. They are all asking for smarter and bolder approaches to ESG performance.
What is ESG? “E” stands for Environmental, “S” stands for Social, and “G” stands for Governance. The ESG criteria are standards for a company’s operations that investors use to screen potential investments. As a subset of ESG, there is also an enhanced focus on DEI, which falls in the Social part of ESG.
What is DEI? “D” stands for Diversity, “E” stands for Equity, and “I” stands for Inclusion. Like any emerging concept, admittedly, these can mean different things to different constituencies, but there will be a consensus on corporate standards over time. Firms addressing ESG today will be ahead of the pack.
While ESG has been around for years, many factors have accelerated the recent focus, particularly the pandemic and huge human and business losses caused by extreme weather events. As such, it’s an increasingly important criteria investors use to evaluate companies in which they might wish to invest.
Notably, institutional investors are observing a correlation between sustainability performance and financial performance. According to S&P Global, “in the first 12 months of the Covid-19 pandemic, many large investment funds with ESG outperformed the broader market.”
What does this mean for the commercial real estate industry?
As institutional investors increase their real estate portfolios, they are increasingly factoring in ESG performance as part of their evaluation and decision-making. As a result, we will see them push real estate companies looking for capital to share their sustainability efforts around ESG performance.
Cities like Dallas are passing climate action plans, which include reducing emissions from buildings. Dallas has set a goal for all new construction to be carbon neutral by 2030. Companies with ESG goals of their own are increasingly factoring in a building’s ESG footprint into their leasing decisions. They ask for greener buildings and third-party certifications, like LEED, Green Globe, and Energy Star ratings. Proptech investor, Fifth Wall, has started a Carbon Impact Fund to invest in companies who are developing technologies that help reduce building output. This is great for the real estate industry as high-performance buildings consume less energy, carbon, and water and cost less to operate, which translates into savings for customers.
In 2020, both Fitwel and the International WELL Building Institute saw a surge in registrations. Office owners, out of concern for their customers and employees’ health and wellbeing, took measures to improve indoor air quality and outdoor workspaces.
Many companies are leaning into promoting DEI, ensuring everyone feels empowered to flourish. It has been proven in many studies that the more diverse the company, the better the decision-making, and the better the financial and business outcome.
Considering the war on talent, it makes good business sense to create a diverse talent pool. I saw a statement recently that resonates around this topic – “Help employees find purpose…..or watch them leave!”
The (triple) bottom line is that ESG is good for business. What does that look like?
- Investing in smart technology to enhance the sustainability of existing buildings.
- Building sustainable properties with increasing reliance on renewable energies.
- Following our investors and customers, setting goals toward carbon neutrality or net-zero emissions.
- Benchmarking ESG performance with third-party organizations like ULI Greenprint and reporting to GRESB.
- Increasing use of technology to engage stakeholders on customer experience and community engagement programs.
- Companies will elevate the importance of DEI to make their workplace more diverse and change their hiring and talent management practices to draw from a broader pool of qualified prospects.
- Real estate companies will also increase their investment in programs educating minority students to build a future diverse talent pool.
Michael Dardick is the founding partner and CEO of Granite Properties.