‘Greed is good’ goes the famous line from the movie Wall Street. Nowadays though businesses and their stakeholders, including commercial real estate investors and tenants, increasingly are flipping the script — towards environmental and social responsibility. Environmental, Social and Governance (ESG), corporate standards measure the sustainability and societal impact of a business or investment, are becoming increasingly important to stakeholders. ESG are designed to show that a company can do well while also doing good.
It’s not just some mission statement on an office wall or in the company handbook. Consider that, in 2019, CEOs named societal impact as the top success factor for annual performance for the first time ever, according to Deloitte Consulting LLP’s Global Human Capital Trends survey. In their “Emerging Trends in Real Estate 2020” report, PwC and the Urban Land Institute found that Millennials, which recently surpassed Baby Boomers as the biggest generation, are driving ESG, with 55 percent of them pointing to those priorities as factors in their investment decisions, well above the prior two generations.
How did the ESG focus come about? It’s about values and aligning corporate values with those of your customers, investors, business partners and communities, especially in an era of hyper-awareness. ESG demonstrates to those parties that there is a socially conscious upside beyond the business’ bottom line. The more shared values — i.e., the more a company connects in the life-changing and social impact areas — the greater a customer’s loyalty and the higher the company’s sustained revenue growth, Harvard Business Review asserted. It’s little wonder then why CRE tenants and investors have embraced ESG.
ESG covers many aspects of business in addition to the aforementioned value creation, from sales and marketing to operations and HR. In CRE, the environmental component covers climate change, carbon footprint, water conservation and waste management. The social focus involves diversity, equity and inclusion (DEI); employee wellness and benefits; and corporate philanthropy. Corporate governance includes business ethics and compliance, as well as board diversity.
The top five drivers of ESG are managing investment risks (64 percent), client/investor demand (59), fiduciary duty (43), reputational benefits (41) and improved financial returns (35), according to a December 2020 study by the CFA Institute. The client/investor demand motivation has grown the most since CFA’s prior ESG survey in 2017, jumping 14 percentage points. ESG standards carry even more weight in the more democratized world of CRE where so many more people, with the latest research at their fingertips, can participate through REIT investing, crowdsourcing and the like.
It’s important to note that risk outweighs reward by nearly 30 percentage points in the survey. The lessons learned from the pandemic year and Great Recession won’t soon be forgotten by investors, who continuously strive for durable, sustainable options in which to allocate funds.
The reputational benefits category saw the second biggest increase, expanding 9 points in three years. Adam Grant, author and organizational psychologist at The Wharton School of the University of Pennsylvania, asserts that in healthy relationships honesty is an expression of care. People know a genuine article when they see it, whether it’s company personnel assessing benefit offerings and DEI programs at work or community leaders tracking the business’ contributions to charitable and/or environmental initiatives. And they care that corporations care.
Done the right way those ESG actions become a natural advertisement for the company, one that reaches potential investors. And everybody can rest assured that the company won’t be on the front page of the newspaper because of a scandal about EPA infractions or discriminatory hiring practices.
Additionally, a company that operates with total transparency builds trust. A comprehensive ESG strategy also builds value. Greater operational efficiencies across not only an individual property but an entire real estate portfolio lead to lower costs, greater returns and thus higher property valuations. Customers can feel good about their dollars going to a company with strong values, business partners can feel more trust because of the ESG commitment, and investors can feel confident about the resulting operational efficiency and financial sustainability.
An old tenet of business growth holds that before you earn market share, a company must have mindshare. On that theme, the traditional sales and marketing funnel asserts that before customers buy from you, they must know and then trust you. There’s no such thing as soul share, but with ESG in this age of empowered consumers and investors people increasingly want to know if companies have the heart, humanity and enduring values that offer a connection beyond the commercial to community, from the merely transactional to the transformational. In CRE, that good will do many well.
Want to learn more? Click here to learn about CRE sustainability trends in 2021.