“Just between the two of us, when I see ESG, I sometimes think to myself: Elites See Green,” confessed the smiling, full-time project manager for a prominent German property developer. When I asked him what he meant, he responded, “You know, in these times of crisis, so many companies are grappling to survive. They have more pressing concerns than elitist notions of protecting the environment.” That’s where the conversation ended – and it’s not often that someone leaves me speechless.
I don’t want you to get me wrong. It’s not that I have no sympathy for people in positions of responsibility and the serious operational challenges they face at difficult times like these. But anyone who uses “grappling to survive” as an argument against protecting the resources that we all need for our long-term survival is behaving paradoxically, to say the least. And anyone who cites the serious impacts of the coronavirus pandemic on the one hand to dismiss the climate crisis as “elitist” on the other will experience a green wonder sooner than they would like.
From victim to perpetrator
The greatest threat the real estate industry currently faces is not a virus for which we will one day have a vaccine. No, our industry has to come to terms with an incurable ‘disease’ with a socially and politically explosive background: buildings are responsible for 40% of global CO2 emissions. If environmental restrictions soon become as strict and highly visible as Covid-19 restrictions, real estate industry leaders will be regarded not only as victims but also as perpetrators. And those who have not fully understood the importance of the “E” in ESG will be held accountable.
Coming of age under pressure
Prompted by the emergence of Covid-19, the industry has come to appreciate that ESG is about far more than just the “E.” A recent survey conducted on behalf of BNP Paribas Asset Management revealed that social considerations are becoming much more important in 2020. Of the 129 institutional investors and intermediary distributors from nine European countries surveyed, 79% cited social considerations as having a positive impact on long-term investment performance and risk management. The importance of social criteria rose 20 percentage points from before the crisis, closing the gap on Environmental (74%) and Governance (76%) factors. Under pressure from the public and investors, ESG has now come of age.
From sustainability to ESG
The rise of ESG has been matched by the decline of sustainability, which, for far too long, remained far too vague when used in isolation. What used to come under a general rule of thumb – “Do good and things will be fine in the long term” ¬– is now being put into practice with ESG, which has a sharper focus on three specific principles: Environmental, Social and Governance. In future, companies will be expected not only to act, but also to have high-quality, accurate, complete and verifiable ESG data that can be used to support investment decision-making processes.
ESG is becoming quantifiable
The fact that this is far more than another passing fad is shown by current efforts to develop a globally applicable standard, based in part on the “ESG Circle of Real Estate” initiative founded by Union Investment. From 2021, the ESG performance of real estate will be measurable using a comprehensive scoring model. A scale of points from zero to 100 will allow tenants and investors to see what percentage of a portfolio meets climate targets and ESG criteria. Properties will be scored every year and the performance of each portfolio will be determined using the average of the properties within the portfolio. The scoring model has what it takes to become the basis for benchmarking throughout the sector as a whole.
We are learning too
Here at the REB Institute, we have been far from inactive. Together with the Society of Property Researchers, Germany (gif), we have been preparing a study for publication this year to shed light on the status quo, emerging standards and potential future scenarios and strategies. We believe that the central question is how we can support companies on the road to ESG integration and identifying key levers for optimization, best practice, risk measurement and risk management.
Self-image and external perceptions
Because one thing needs to be clear: With a market-leading ESG performance, property owners and developers should have more than just better managed, more efficient and more profitable buildings. They should also ensure that stakeholders and the public are kept well informed. A successful ESG strategy means not only leading the way on environmental and social considerations, but also being recognized for this forward-looking leadership role. Positive self-perceptions are nice, but it is the – ideally equally positive – external perceptions of market participants, investors, clients, etc. that determine a brand’s actual position in the market.
Conditio sine qua non
I am convinced that an authentically communicated ESG strategy will become one of the most important drivers of brand strength and brand positioning in the real estate industry – and the conditio sine qua non for gaining access to the capital market. I certainly won’t be speechless the next time I run into the property developer I mentioned at the top of this article again. If he has time for a conspiratorial espresso, I’ll have the following tip on surviving in times of crisis: “ESG. What else?”
With branded regards
Your Harald Steiner