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Why ESG is everyone’s responsibility.

01.05.2024
Commentary

When talking to our colleagues within the investor echo chamber we might be forgiven for thinking that robust ESG practices, and an appreciation for how they drive value for investors, are a given across the property sector. Driven by the rapidly shifting regulatory landscape, and pressure from the market, ESG has become unavoidable. More real estate funds are focusing on how they can upgrade their investments sustainably, analyse the footprint that their own operations leave and more closely scrutinise the impacts that their investments have.

Yet, whilst the majority of real estate funds are firmly committed to making sure that their investments are delivering against ESG targets, many smaller firms, individual investors and family-led funds may not always be so keen, or able, to put environmental concerns and social value first.  

Away from the scrutiny of high-profile or institutional investors a clearly-defined ESG strategy might seem like an unnecessary luxury or difficult to achieve. From a regulatory perspective, there are several challenges associated with ESG best practice adoption, not least of which is simply the overwhelming number of guidelines, requirements, and their associated jargon to understand and adhere to.  Many are also put off by the way that some ESG data providers and reporting bodies assess progress, with some benchmarking smaller firms against some of the sector’s biggest players, who no doubt have significant sustainability teams and budget at their disposal.  

Evidently, there is a clear need for more education and more support. ESG can’t just be the preserve of those who are perceived to be able to afford it – we need everyone to be able to embrace it. For smaller funds and asset managers, that starts with work to embed clear ESG goals and guidance into their investment and asset management strategies, incentivising analysts and asset managers to consider investments’ environmental and social impacts, and not just occupancy rates or ROI.

It’s also vital to ensure that, in educating asset managers, you lean into the major upside benefits of adopting better ESG practices. Being overly focused on the punitive elements of relevant regulation and legislation can make ESG adoption seem like a chore. Chief amongst the benefits to champion are the green premiums associated with assets that have been developed or retrofitted to high sustainability standards. In the same way that underinvested assets can be marked down on price, struggle to attract tenants, or even become stranded, there is significant evidence to suggest that tenants and prospective buyers will pay higher rents and purchase prices, respectively, for future-proofed assets.

Developing a business culture which understands ESG as an essential bread and butter part of an asset manager’s job description, rather than a ‘nice to have’, is also imperative. The ESG agenda in property is being driven, at least in part, by the latest generation of property professionals entering the world of work. As a bottom-up priority, we need to both take advantage of their well-placed passion and help them to channel it into taking good ESG practices forward into future leadership roles. So as well as general training for colleagues, ESG-first practices should be drummed into new recruits from as early an opportunity as possible.  

With such training there can be a tendency to focus too heavily on the ‘E’ in ESG. Upskilling teams in ESG literacy must also take into consideration approaches to social responsibility and governance. At Clearbell, we take an occupier led approach, aiming to always punch above our weight when it comes to the amenities we offer relative to the size of the office. To achieve this in practical terms, what we’ve ensured is that our teams are implementing best practice processes around the measurement of tenant and local community satisfaction, as well as putting more emphasis on costs associated with placemaking when weighing up a prospective purchase. On the governance front, developing our proprietary Environmental Management System – a platform to provide all of our employees with the tools they need to embed ESG into their day-to-day – and delivery of our annual voluntary sustainability report has been strongly received by our investors and stakeholders.

For many of us, it’s clear that prioritising purpose in our investments needn’t come at the cost of profit and investor returns. However, not all investors, commentators and fund managers understand this. We need to do a better job of arguing the case for ESG and ensuring that detractors and those with knowledge blind spots understand that its purpose which increasingly drives profit and that failure to invest in ESG now will only yield more costs further down the line.

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