Brenden Millstein is the President and Co-Founder of Carbon Lighthouse, on a mission to end climate change.
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The Covid-19 pandemic has dramatically impacted the commercial real estate (CRE) world, forcing businesses to be accountable in entirely new ways. While one might assume that the resulting economic downturn would negatively affect sustainable investing, I believe this couldn’t be further from the truth. Responsible investing and the search for long-term value don’t disappear in a crisis. If anything, despite this crisis, environmental, social and governance (ESG) investments have steadily increased since the start of the pandemic. Globally, sustainable investment funds doubled to $54.6 billion in the second quarter of 2020 compared to the first. The markets are responding and being increasingly proactive in their ESG strategies.
So, what does this mean for the world of CRE? The industry is on the precipice of a digital transformation as the convergence of ESG, new administration, occupant needs and market demands presents an ideal opportunity for CRE to prioritize the “E” in ESG as an integral driver of economic recovery and long-term portfolio value.
There has been a rise in ESG investments.
In 2019 and early 2020, there was a resurgence of climate change awareness, inspiring many to take action and causing capital markets to react like never before. Industry leaders such as BlackRock, Goldman Sachs and Blackstone, among others, have announced how ESG will be a key factor in investment assessments moving forward. Other investors like the New York State Pension Fund, one of the world’s largest investors, announced in December that the fund would be divesting from fossil fuels (registration required) in the next five years.
Data reveals that companies with strong ESG principles outperformed their conventional counterparts in stock performance in the first quarter of 2020, even as the outbreak sent markets crashing. Investors have taken notice.
Now, with a new administration and a new climate plan that specifically calls for a reduction in building carbon emissions, ESG is gaining momentum. The impact is felt even at the state and local levels as many hone in on their climate plans. For example, Local Law 97 in New York City will require that buildings 25,000 square feet or larger reduce their carbon emissions by 40% by 2030 and 80% by 2050. While CRE now has solutions to unlock the value that ESG has to offer, the industry also has to keep in mind some best practices for success.
For CREs, executive buy-in is critical.
The growing momentum of ESG investments means a significant shift must also occur at the CRE executive level. Historically, sustainability has been viewed as a nice-to-have with little impact on revenue or other financial goals. Now we’re even seeing executive compensations directly tied to ESG goals, holding executives accountable for their organizations’ ESG impact. This mounts the pressure on executives to prioritize ESG, and if they do embrace these goals, it can serve as an opportunity and value driver for their organizations. While executives may not have all the answers, they must lead their organizations and empower their teams to deliver the ESG impact that’s being demanded of them.
Evaluate the current skills and expertise of leadership and other key roles in the areas related to ESG to assess what partners and skills need to be brought in. For example, the “E” in ESG will require specific strategies around carbon emissions reductions versus the expertise required to inform the “S” or social goals. From there, you can create an honest assessment about what's working and which skill sets, technologies or solutions leadership should invest in to build on existing strategies.
Data-backed strategies create a competitive advantage.
Proof is critical to ESG. Until now, the industry has mostly dealt with greenwashing without real impact. Yet, with the market demands for demonstrable carbon reduction impact, many owners are struggling to find a path forward amid the pandemic’s complicated economic impacts.
With every expense — both existing and new — under increased scrutiny, only data-backed investments (ESG or otherwise) that show real financial and climate impact will pass investors’ sniff test. The good news is that technology is redefining measurement and reporting for key sustainability initiatives. CRE owners can provide proof of their carbon emissions reduction to investors using AI and machine learning technology.
As CRE looks toward recovery, it will also be critical to demonstrate this ESG impact to tenants. Many employers are seeking sustainable workspaces in response to the demands of their employees. They understand the benefits of ESG for their employees and their business and will require climate-friendly workspaces as a result. Demonstrating the ESG impact of a building can provide a competitive advantage as CRE begins to reopen this year.
Create long-term value through ESG.
Data-backed ESG will continue to drive advantages for CRE in 2021. Maximizing a building’s energy usage through ESG measures directly impacts overall net operating income and subsequently can drive increases in asset value upon disposition. If an owner ultimately wants to sell a property, they’ll be more likely to attract investors, and for those buying, ESG will be a crucial qualifier when deciding which properties to invest in.
Much of the built environment can be optimized for enhanced societal and environmental benefits. Now it’s up to CRE leaders to take action to prove the holistic ESG approach.
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