The COVID-19 pandemic has forced many people to reconsider their thoughts surrounding environment, society, good governance and profit. That has sharpened minds and refocused attention on ESG criteria and property investments. Many also now view the pandemic as an opportunity to build greener and plan ahead.
Environmental, Social and Governance (ESG) is quickly gaining importance and status. It has evolved from the sustainability efforts of companies trying to implement corporate responsibility measures and trying to match the changing culture around sustainability. It has gone from something niche to a more necessary element of investments and asset management.
Why ESG factors represent a significant opportunity
As evidence builds around the benefits of ESG more and more companies are implementing their own strategies. Investment companies and pension funds are integrating ESG metrics into their overarching strategies as well as at the individual fund level. The biggest driver is cited as risk management – both in terms of investor and returns pressure – rather than regulation.
The market driven benefits of an ESG focused approach range from increased rental and sales returns, decreased risk of obsolescence to lower void times and lower operating expenses. There has been much effort to measure and demonstrate the impact on staff productivity of healthier working environments, which adds considerable strength to the business case for ESG as staff costs are by far the largest cost of doing business.
The UK Government has set a target for our country to reach net-zero emissions by the year 2050, with the Scottish Government committing to 2045. This means that any greenhouse gas emissions, caused by human activity, must be balanced out by emission reduction measures. 80% of buildings that will exist in 2050 are already built and many firms are already bringing their net-zero targets forward to 2030 or even earlier.
One option, on the course to achieving net-zero carbon, is to operate your business, building or facility as a closed loop business. Although we tend to think of reusing products as being the main benefit of closed loop businesses, operating in this manner can also save time, money and improve processes throughout your business. Furthermore, it doesn’t just stop with your business, more benefits can be found by looking further into your supply chain to see where waste can be eliminated.
Additionally, having more regular discussions with other people involved in the supply chain, measuring disclosed performance across the board and looking closely at products and services, will lead to reduced material consumption and transition to more sustainable products and services.
ESG has never been more important on our journey to a net zero economy.
To better understand the opportunity of ESG, companies that have strong ESG performance do better financially, invest in R&D, develop products and make project management decisions that fully consider ESG impacts throughout their life cycle. Many businesses have identified their commitment to ESG as being particularly important in being able to attract and retain talent. Staff who are attracted to your ESG based ethos are likely to work at your company for longer.
Net Zero Carbon and post pandemic indoor environmental quality are often a prelude to a much broader ESG discussion for firms.
ESG Criteria
The market for ESG professionals is growing fast as businesses realise that they need to be seen to be having a positive impact. The market driven requirement has a direct impact on value in terms of investor returns, sale and rental.
Some examples of the Environmental elements of an ESG strategy include Climate related risk and mitigation, NetZero GHG Pathways, water consumption, waste and recycling and pollution.
Examples of the types of social performance indicators of an organisation include - staff health and wellbeing, engagement with local communities to share services, work experience through local schools, employee relations.
Governance criteria are focused on how the organisation conducts itself, examples of these requirements include the organisations values, modern slavery policies, executive pay, bribery and corruption, political lobbying and board diversity.
ESG factors touch on every area of a business. For further guidance, the Better Buildings Partnership has recently launched their Responsible Property Management Toolkit as a comprehensive source of ESG factors to take into consideration. This guidance includes a clear and simple checklist of ESG factors covering 13 topics – environmental risk, operational management, ratings & certifications, supply chain management, fit-out & alterations, occupier engagement, water, waste, energy, transport, social value, biodiversity and health & wellbeing.
Now is the time to act
Right now, incorporating ESG into your business is voluntary. However, with increasing legislative requirements coming down the line, now is a great time to make changes. As we accelerate towards a circular economy, businesses have a window of time, and opportunity, to take ESG on board.
For many businesses, staff retention is a costly and constant problem. Making these changes now and setting ESG as part of your ethos, will help attract and retain the right talent to suit your business as environmental standards progress. Incorporating ESG into your business is an effective way of future-proofing your business.
For property developers, owners and operators, we believe now is the best time to invest in technology that may help differentiate your properties or businesses from the competition. Tenants now look for office locations that offer energy efficiency measures and air filtration systems, increased security features, and more outdoor “green” meeting spaces.
How can ESG be incorporated into Property Management?
There are many ways in which property managers can engage with both commercial and residential tenants that incorporate ESG.
Firstly, the tenant handbook could include explanations on the importance of managing ESG issues and suggest ideas for how to improve performance.
Secondly, the lease agreement or tenancy agreement could include terms and conditions that encourage the investor or tenant to carry out their role, or use the building, in a sustainable way.
The Covid-19 pandemic has given many organisations food for thought in terms of how their assets are managed. Due to lockdowns, many buildings lay empty while their systems remained running. This resulted in energy bills that were just as high as any other time during their asset lifecycle. Following the return to offices, public transport and teaching spaces, their has been significant effort to monitor and communicate the safety of the environment. This has led commercial landlords to focus much more on the data at their disposal to better manage assets.
The future of ESG
It is an unavoidable truth that the environmental and social pressures that already face us will only increase. Yet, whilst potential costs lie ahead for the property investment market, so do significant opportunities.
ESG investment is no longer only about mitigating risk but also about uncovering and adding value in an ethical and responsible way. Investors who embrace ESG concepts look set to gain a competitive advantage over those that fail to do so. This is an exciting time to be investing in property and making choices that have the potential to have a positive social, environmental and economic impact for years to come.
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