If we take a minute to think about some of the most prominent news stories of recent years, how surprised would you be if you were told that they can all be linked to environmental, social or governance (ESG) factors in some way? In the UK we have been bombarded with stories of Brexit, on what seems like a daily basis, since David Cameron promised an EU referendum in February 2016. The EU referendum was called following increasing pressure from groups including the UK Independence Party (UKIP), who built a campaign fuelled by fears over immigration. Now consider how this may be linked to ESG. Climate change (environmental) is having an increasing influence in driving migration[1](social), and so we can begin to realise how addressing environmental performance, such as our contribution of Greenhouse Gas (GHG) emissions, is crucial to reducing the displacement of people and stabilising global politics. Similarly, increasing food poverty, including the use of food bank usage in the UK, has been associated with employers not paying their staff a suitable wage.[2] Poverty and inequality, along with environmental factors, are all significant social issues affecting the global economy.
Benefits of ESG
However, even when faced with the positives that the inclusion of ESG aspects into business strategy can bring – such as improved social cohesion, climate change mitigation, improved public health and well-being, and increased investment potential – we are also faced with challenges around, for example, the efficacy and financial impact of implementing such measures. Those organizations that integrate ESG into their core business strategy may be able to capitalize on better investment opportunities. More and more investors have now shifted from considering whether or not to adopt ESG principles, to a more practical approach of how best to implement ESG strategies, as a part of due diligence. By doing so, investors can enhance the long-term performance and sustainability of their investments. New research is working to debunk the myth that implementing ESG into business strategy brings limited results or costs too much. Research into 50 of the largest Dutch investment schemes found no correlation between the level of asset management costs and sustainability rating – highlighting that schemes with high ESG scores did not incur greater costs than their peers with low ESG ratings.[3] Furthermore, by implementing measures to improve environmental performance – such as developing zero carbon buildings – there is an opportunity to not only eliminate GHG emissions but also reduce operating costs and achieve positive returns.[4]
ESG Reporting
Investors
are increasingly turning to ESG reporting metrics – such as GRESB – for input
into how to find the best investment opportunity with ESG credentials. Decision-makers
are most likely to engage with ESG if they can see how aspects impact them and
how taking action will lead to tangible benefits, and this is largely
influenced by the availability of good quality, transparent data. About 67% of
institutional investors say that greater transparency in ESG reporting from
companies would be the most useful tool for driving ESG integration.[5] By first measuring ESG
performance – be that energy consumption or waste generation, asset health and
safety risk or an analysis of asset flood risk – this can help to open a
dialogue with those in a position to allocate resources, that will allow the
implementation of ESG into business strategy.
Deploying bespoke, real estate-specific Proptech such as RiskWise, can
be a very cost-effective way to demonstrate ESG commitment to shareholders or
investors.
Conclusion
So, with the benefits of embedding ESG into business strategy coming at little or no extra cost, can we really afford to ignore these matters any longer? We are already seeing the devastating impact of climate change on people and property around the world, with the California wildfires one particularly graphic recent example[6]. In the absence of strong political will, businesses are in the prime position to address and influence global issues on a huge scale, whilst not having to rescind financial performance. ESG-integrated portfolios are likely to perform more strongly in the future as ESG credibility is increasing, which in turn will have a positive impact on sustainability, globally.
Sustainability is reaching an inflection point where the economics and returns for real estate investors and owners are driving greater investment. Green loans, which tie interest rates to property sustainability goals and energy performance, are expected to increase 467% to $42 billion in 2017[1].
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