21 July 2022
With 400+ in attendance at the IMN ESG and Decarbonizing Real Estate Forum, there was palpable enthusiasm and optimism about the recent acceleration of ESG in commercial real estate (CRE). Environmental, Social, and Governance factors are no longer siloed criteria in a checklist; they are dynamic components of a complex system – the built environment – that interact and affect one another while generating terabytes of data that can be harnessed to benefit people, planet, and profits. There was widespread acknowledgment among participants that implementing ESG in commercial real estate is hard, but that it must be done because the cost of inertia is too high. The way forward requires partnerships, collaboration, innovation, and creativity to create solutions that will decrease operating costs, increase yields over the long term, and benefit the diverse communities served by CRE. Common themes expressed by ESG leaders at the conference coalesced into three areas.
Deepening the S.
There is consensus that the next wave of progress in ESG lies in deepening the S. In other words, how can CRE enhance the lives of people? The S refers not only to occupants and neighbors, but also to human capital in our industry. Multiple panelists noted that the S metrics lag behind Environmental metrics and are the least reported on. The pandemic and George Floyd’s murder exposed long-standing structural issues of inequity and lack of access. Improvements in Diversity, equity, and inclusion (DEI) in CRE will happen when firms take a long-term, two-pronged approach to recruit talent from communities of color and retain that talent for leadership. The foundation of this approach is a DEI roadmap with goals and KPIs. We now know from the pandemic that healthy workspaces and wellbeing are tightly connected. Higher occupancy rates can be expected with healthier buildings because tenants will demand it. Building certifications such as Fitwel and WELL are finally becoming more mainstream and will provide a higher level of assurance to tenants, owners, and investors.
Data.
Technology and data are crucial to progressing towards ESG targets. There are still frustrations with collecting and managing data generated by real estate assets, but conversations pointed to managing, understanding, and harnessing data as the future. Smart buildings are producing terabytes of nonfinancial data and the question is how to best use that data for effective decision making. Part of the answer may lie in using data to forecast and model future scenarios at both fine and coarse scales. One eye-opening effort uses “digital twins” to model effects of building optimization at the scale of the city. Transparency, disclosures, and accountability – the G – will be facilitated by data.
Regulations.
Almost every panel expressed a need for more regulations to push the adoption of ESG broadly, although it is unclear whether this would be best solved at the municipal, state, or federal level, or a combination of all three. At the same time, the forthcoming SEC disclosure regulations are a cause for concern, especially in terms of the anticipated financial impacts. More regulations will create new expectations of accountability for owners and investors, which will require asset performance data and greater transparency. An interesting concept that came forward is that the definition of fiduciary responsibility may need to expand to include ESG standards. The logic is that physical and transition risks are material to CRE, therefore fiduciaries must consider and disclose the potential financial impacts of those risks.
In the current recessionary environment, ESG is a lodestar for owners and investors. CRE faces headwinds from high inflation and rising interest rates. If a flight to quality assets occurs, that will heighten the importance of strong asset management. Focusing on asset management will mean that owners and investors need to double down on ESG as a risk management strategy.
The ESG landscape in the UK and Europe are a bell weather for the US. At Longevity Partners, we draw on our roots in the UK and Europe to collaborate with clients to navigate a dynamic ecosystem of benchmarks, frameworks, reporting schemes, disclosures, and regulations to determine best practices and mitigate risk. Longevity Partners is uniquely positioned to partner with our clients wherever they are on their ESG journey.