The idea of environment, social and governance (ESG) is under siege. Whether from notable political figures in the U.S. accusing it of promoting a “woke agenda” to business leaders like Elon Musk dismissing it as “a scam,” questions have been raised about whether ESG should be abolished.
A panel at Global Property Market (GPM) disagreed, with moderator Rebekah Tobias, managing director of investor relations and business development at MARCOL, declaring: “ESG is very much here to stay.”
Tobias claimed demand for ESG “is much higher on the agenda than ever before,” as more investors place it as a high priority and net-zero goals begin to influence the built environment.
With the top 25 global investors committed to sustainability, according to a Cushman & Wakefield survey, and 81 per cent committing their assets under management to green policies, Tobias led a discussion about how the panelists are adapting their companies to a net-zero shift and the growth of ESG.
The march of corporate ESG
Timothé Rauly, global co-head of real estate at AXA Investment Managers, said it was key to understand what to avoid and what to enter before delving into ESG.
With government pressure from net-zero pledges, AXA pressed ahead with initiatives like reaching net-zero by 2050. Rauey said AXA is examining ways to improve energy efficiency across its building portfolio and reducing carbon dioxide emissions.
The liquidity of the buildings is affected by energy performance as well, with one AXA property in Germany struggling to find capital due to a poor energy performance grade. Without superior energy performance, more opportunistic buyers will move on or the building will trade at a discount, he added.
“We see that in the long-run it will drive a very significant component of the performance of the ultimate investment,” he said.
Tara McCann, senior managing director at Rockwood Capital, identified a continuing demand for diversity, equity and inclusion (DEI), with more investors and consultants asking about corporate policies, goals, infrastructure and governance. Tenants, investors and Rockwood care, she said, compared to the past where there was little interest.
The value of ESG is being infused into Rockwood’s strategies by considering the impact of its real estate on urban environments and communities, McCann explained.
Rockwood is collecting and analyzing data on the health, economic, social, environmental aspects with key performance indicators, and asking how it adds to the community, diverse employment, social aspects and green space.
“We’re trying to make a case that there’s value enhancement to creating real estate that benefits the broader community and whole world.”
The technological challenges
To achieve ESG targets, the groundwork must be set first with data. Information like greenhouse gas emissions, energy consumption and carbon intensity must be established.
Rauly said receiving access to data remains difficult. Building and tenant data is not always available or as useful as they would like. AXA for example has a 2,000-building portfolio with an intent to drive energy efficiency, but the company does not have a window into every building.
He noted the value of live data capture at buildings AXA owns to measure energy consumption and the temperature of a building to make appropriate adjustments.
The push to acquire green building certifications like GRESB increased a desire for next-generation systems to gain building data, according to Catherine Ann Marshall, principal of RealAlts. But the systems are expensive and leave clients unhappy because “they can’t do what they want them to do.”
In response, firms are using free software like ENERGY STAR Portfolio Manager to save money and gain flexibility with their data for their portfolio. It helps smaller firms especially in the U.S. and Canada, Marshall added.
The importance of governance
Tobias raised the value of governance to provide leadership and guidance as building regulations like the Energy Performance Certificate in the U.K. mandates by 2028 that landlords cannot rent buildings to tenants without a minimum rating for high-energy performance. It could potentially cost trillions to upgrade nationally, requiring substantial fundraising to refurbish assets.
“If governance isn’t in place, if the leadership isn’t there, if the leadership is not walking the talk, it just doesn’t happen," commented Marshall. "It just becomes something for the marketing department as opposed to the C-suite and the asset management operations department.”
Marshall recounted RealAlt’s focus on building an intricate fund with a screening system for managers. It observes the maturity and the capability to achieve ESG pledges among organizations making bold pronouncements. Once it establishes that proper governance is in place and is evolving, then it will switch the focus to managers that get hired to monitor largely the environmental and social factors.
“If you want to get hired today, you’ll get hired on the G and fired on the E,” she finished.
Gijs Plantinga, the director of North American investments at Bouwinvest, said he would like to see more than an officer dedicated to ESG. He is interested to see how deeply rooted an organization’s ESG awareness, execution and plans are.
He recommended a framework, as well as more concrete pledges and targets. He expects the C-suite to understands what it means to work toward net-zero in all its operations and financial underwriting.
ESG around the world
Marshall referenced the anti-ESG movement in the U.S., where the politicization of the matter is seeping into pension funds and investment management. But there was also progress, like the U.S. Department of Labor releasing a final rule on ESG for the Employee Retirement Income Security Act. It effectively melted the freeze on considering ESG within pension funds.
“If you can show that there is a tangible financial aspect to consideration of the ESG factor, you can consider that in making your investment decision,” she summarized.
Europe is ahead of the curve with ESG factors as part of the fiduciary duty, while in Canada it remains a “grey area” with gradual improvements.
Plantinga also found resistance in Europe, but “many” pension funds say ESG is equal to their returns. There is a different definition of duty in Europe compared to the U.S. he said. In Europe, the social factor revolves around housing affordability and housing for the elderly, while North America focuses more on DEI initiatives.
Marshall said she spoke to the head of one of the largest North American consulting firms about her perspective on ESG. The head said many firms try to drive ESG throughout the firm with underwriting and asset management, but she found no one focusing on the social factor of ESG.
“I do believe that we’re coming to a point now where because we have gone from inputs (just like building certifications) to processes (like GRESB) now to outputs, that there’s a role in the markets to create funds around very distinct outcomes of tangibles.”