The business case for ESG. Shouldn’t it just be business as usual?
Published on 20 February 2019
Environmental Social Governance (ESG) refers to “the three central factors in measuring the sustainability and ethical impact of an investment in a company or business”. These factors are becoming increasingly important investment considerations.
Since 1970, there
have been more than 2000 academic studies seeking to identify if there is a
link between ESG and financial performance [1] – this really isn’t a
new subject. The findings demonstrated high ESG ratings and strong
sustainability practices correlated to better financial performance across
multiple asset classes and regions.
ESG and Fund
Performance
Recent award-winning research found that
“sustainable” Real Estate Investment Trusts (REITs) benefited from higher
rental income and lower interest expenses, resulting in increased cash
distribution to shareholders [2]. A lower risk profile was also
identified attracting higher premiums to Net Asset Value (NAV). Transparency
through public disclosure was found to be a key facilitator of driving
improvement.
GRESB is one of the most popular voluntary certifications for private Real Estate portfolios.
Research shows that strong GRESB performance correlates to enhanced fund
returns for non-listed funds. Overall, a 3% fund return uplift was observed
between the lowest and highest GRESB scoring funds.
Both these examples
demonstrate the level of impact ESG is having in the real estate sector. More
companies are taking this seriously as it makes economic sense with increased
profitability, social sense through the implementation of ethical values and
environmental sense through reduced ecological impact.
People & Planet Before Profit
There have also been recent surveys, highlighting that nine out of ten millennials believe the success of a business should be measured by more than just financial performance [3], and 60% of millennials want to join companies that have a societal purpose [4]. Added to that, climate change has rapidly climbed their list of concerns, and this strongly correlated with their overall opinion of businesses. Young people and indeed our emerging workforce could not be clearer when it comes to how they expect businesses to act – people & planet before profits.
Conclusion
There are many and varied reasons why
you should be considering ESG as a fundamental part of your business strategy
and planning. It’s certainly something that we have been helping a large number
of our clients with. When we talk about setting an ESG strategy, it’s no longer
met with head-scratching and debates about the value it can bring but is
increasingly seen as a fundamental business need in today’s economy. Momentum
is building, but the real estate industry still has some catching up to do.
So the question is, why do we still need to be setting out the business case? Shouldn’t ESG be business as usual?
Putting “S” in the spotlight – a concept whose time has arrived
Social disruption from climate change, inequality, and public health are some of the defining issues of our times and the real estate industry plays a crucial role in addressing these challenges by harnessing strategies that protect and enhance property, people, and the planet.
We are entering a new era of ESG data. Historic market failures regarding our negative environmental and social impacts, and the resulting climate change, nature loss, and social inequality, are starting to be corrected with structural changes to the market.
Transaction Management and the Transition to ‘Net-Zero’
Ahead of COP26, due to take place in Glasgow this November, IPCC has released its most recent report on climate change. The report reaffirms it is unequivocal that human influence has warmed the atmosphere, ocean and land, and that limiting human-induced global warming requires limiting cumulative carbon emissions, and reaching at least net zero carbon.
