Four industry experts discussed many of the significant challenges for companies to achieve their sustainability goals during a panel focused on the future of ESG and impact investing at the RealCapital conference.
The panel, held March 2 at the virtual event based in Toronto, was titled Keeping Up With ESG Momentum: Net Zero, Green Bonds & Impact Investing.
Regan Smith, managing director and global head of real estate sustainability at Manulife Investment Management, moderated it. The panellists were Fanny Doucet, managing director and head of sustainable finance at Scotiabank; Catherine Marshall, principal consultant at assets consultancy firm RealAlts; and Anna Murray, managing director and global head of ESG at BentallGreenOak.
Challenges facing the CRE industry
Doucet said it is still a “major question, broadly,” on how many commercial real estate companies will achieve goals such as net-zero targets for their portfolios. Marshall added that in Europe, many larger institutions, particularly pension funds, are ahead of North America in this regard.
She pointed out that many medium-sized companies are simply at the stage of just trying to reduce emissions, and any net-zero roadmap is still in the future. At the same time, she stated she’s personally been aware of much more talk on Scope 3 emissions this past year. (Scope 3 emissions are those that result from assets outside of the reporting organization’s control.)
As well, Smith pointed out the progress in the industry from simply trying to achieve certain certifications like LEED to the mandatory ESG reports seen today.
“You’ve got the smallest people who really are completely confused,” Marshall said, “and are just reaching out to people like me and saying, ‘how do we get started (on ESG)?'”
Working with the largest companies on their environmental commitments opens up a “Pandora’s box,” thanks to the complexity of different strategies needed to measure and reduce embodied and operational carbon. Embodied carbon alone accounts for 11 per cent of global GHG emissions each year.
Wide variations within CRE
There’s also the idea that commercial real estate is not a homogenous industry. Net-zero or lower emissions requirements are different for an outdoor retail space compared to an office building or a hotel, as Smith pointed out.
Marshall’s suggestions for a successful implementation of these goals start with better data accumulation. Beyond that, however, she stresses the ESG teams cannot be detached from the rest of the organization.
Transparency is also fundamental to the success of ESG: “We need to agree as an industry to avoid greenwashing, or as I heard the other day, rainbow-washing.”
While greenwashing relates to a company’s public support of sustainability and environmental concerns while engaging in practices detrimental to those same causes, “rainbow-washing” describes the same behaviour associated with the LGBTQ+ community.
Companies which haven’t at least started dealing with these issues are likely to be forced to shortly.
“Perhaps some real estate companies that don’t act now will find that the pressures from regulators will only increase,” Smith said.
The future of ESG
Doucet also predicted sustainably-linked financing, what she called a “general corporate purpose instrument,” would “probably be one of the big trends for this year” in commercial real estate.
Smith provided a distinction between green bonds, which fund specific sustainability projects like renewable energy, and sustainability-linked bonds, which are funds for an issuer that has explicit sustainability targets linked to the conditions of the bond.
Marshall and Doucet agreed that another area that will continue to grow is an increasing emphasis on “social” improvements within the commercial real estate industry. However, the main issue with this aspect is that Marshall believes there is a shortage of research on the outcomes of social initiatives for the industry.
“I believe that particularly in multifamily (housing) and in retail, the social impact can be very powerful. It can be powerful in reviving flagging shopping centres by knitting them closer into their communities and driving traffic into the shopping centre on that basis,” Marshall said.
In addition to the standard amenities in these properties, some of the social improvements being looked at in the retail sector include access to prayer and lactation rooms.
In addition to sustainability-related certifications, multifamily properties are now more closely examined for their proximity to transit and healthy food options, among other amenities and neighbourhood features.
Marshall cited, as one example, Scotiabank’s April 2021 collaboration with the CMHC to provide $10 billion by 2030 to help finance the construction of better quality, affordable housing in Canada.
“I believe it can be powerful in multifamily; I think it can build a sense of community,” she said. “It can cause the tenants to treat the buildings a lot more like their own home, as opposed to a temporary way station along the journey of life.”