ESG is the New Value Driver for Business and Real Estate
Environmental, Social, and Governance (ESG) represent important challenges and opportunities of our time. ESG is a value driver, as investors increasingly apply these factors to identify future risks and growth prospects.
Today, many companies have ambitious goals to make their business models more sustainable. Businesses are revising the sourcing and use of raw materials and natural resources, and also how they value employees, requiring commercial real estate to keep pace to attract these companies as tenants, buyers or clients.
When business ethics are calibrated around the ESG compass, a company's activities will likely benefit more in the long-term; with potential to increase appeal to debt investors who act sustainably, attract customers seeking environmentally consciousproducts and retain talent wanting ethical careers.
Unleashing ESG as a value driver is a transformative task for executive leaders, as the impact affects core business, not just real estate. Sustainable decision-making can create a long-term impact – top-line growth, talent attraction, reduced costs, a deeper sense of trust amongst consumers – beyond just short-term profit maximization.
The big picture
At the recent United Nations Climate Change Conferences in Paris and Glasgow, politicians committed to implement regulatory action and corrective measures to slow the impacts of climate change, however:
1. Climate change is not the only problem: While climate change poses a threat to the planet and the primary focus of environmental protection is to stop or impede climate change, additional environmental ("E") issues should also be considered high priority, such as ‘transformation to circular economy’ in prevention of waste and pollution. Moreover, to holistically address the environmental issues at hand, social and governance criteria must also be taken into consideration.
2. Regulatory measures alone are not enough: When introducing change, people may respond with reservation, alienation or even rejection. At first glance, enacting regulatory measures seems like a simple solution, but as demonstrated by the various climate conferences, they are difficult to implement. Legal regulations can encourage companies to make their business models more sustainable, but the tasks involved are complex, sometimes more rigorous than in corporate social responsibility programs.
Industry leaders are changing expectations and actively using ESG criteria to understand risk exposure in a wide variety of areas such as, but not limited to, reputation, human capital, business development, financial, legal and regulatory. 80% of the world’s largest companies are reporting exposure to physical or market transition risks associated with climate change.
Companies that are transparent with stakeholders about ESG risks and have plans of action to address exposed areas will succeed, and those who do not will likely become less competitive in the future or will cease to exist.
New and emerging companies are setting the tone for established players, with business models designed to be sustainable from the outset. For example, Patagonia and Allbirds who make planet-friendly clothing, shoes and accessories. In the cosmetics sector, Ringana champions sustainability, from its natural products and vegan, micro-plastic free packaging, made of purely renewable natural substances, to its menu selection in the cafeteria and business model with partners. These sustainably focused companies have made their decision freely and are attracting customers seeking environmentally conscious products.
With sustainable finance in Europe, or impact investing on a global scale, the stage is set for sustainable companies to have easier access to capital, most notably in the field of ESG compliant real estate, where competition is low and demand is steadily growing.
Unleashing the true value of ESG in real estate
For years, "green" certified buildings and companies have been committed to social responsibility. However, more is required to meet ESG criteria, including net-zero emissions from a business and its entire supply chain.
Fewer new buildings, more renovations and conversions of existing properties are only part of the solution. A building should be seen as ‘urban mining, or a storehouse of raw materials. Reusing materials instead of recycling or even downcycling also saves water. New technologies such as the ‘Digital Twin’ or ‘Building Information Modeling’ can also help support the circular economy of materials. Of course, legal framework conditions must also enable reuse.
Each player in the lifecycle of real estate can influence environmental aspects too, with options such as installing green roofs and facades to reduce heating in downtown locations and contributing to habitat for insects, birds and small animals. Modern workplace strategies and use of flex space also has an impact on employee CO2 emissions from reducing regular commuting.
An ethical decision tree is a valuable tool that companies can fully integrate at every level of decision making, including for real estate and investments for ESG compliance.
As more decisions are made ethically, in every aspect of business life, success will be seen in share prices and beyond, contributing to a better and fairer world. ESG is a springboard for new business ideas.
PWC: 2021 Consumer Intelligence Series Survey on ESG - Beyond compliance: Consumers and employees want business to do more on ESG
S&P Global - October 1, 2019: Accounting for Climate: The Next Frontier in ESG
IPCC Special Report: Global Warming of 1.5 °C Strengthening and implementing the global response
Managing Director, Environmental Health & Safety Lead, Global Corporate Services
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