These are all worthy objectives, but they have no explicit claim to being considered ESG. Instead, they are more accurately described as impact investments or social choice investments. This confusion is creating tremendous stress and tension in the investment space. Investment managers are trying to quantify their level of ESG, while clients and the public are trying to understand where the benefits are coming from. We have some entities opposing ESG as promoting a “socialist agenda”, while others are engaging in a form of greenwashing by overstating their actions and activities in an ESG format. This is truly unfortunate as it diminishes the value of ESG, which is sorely needed in our business and personal worlds.
What, exactly, is ESG? It’s a process, essentially the implementation of best practices. As such, ESG may be, and should be, found in all sorts of endeavors and businesses. It’s especially beneficial and appropriate in the real estate investment world. Let’s consider some ways as to how ESG could be applied to real estate investments. It’s acknowledged that buildings are a major contributor to greenhouse gas emissions.
There are different opinions as to the specific percentages attributable to buildings. The numbers frequently quoted appear to be on the high side, considering the numbers separately attributed to other categories such as transportation, agriculture and naturally occurring carbon emissions. If we calculated the sum of all of these allotments, total emission would far exceed 100%.
Regardless of the true percentage, it’s clearly desirable for our building stock to be as “clean” as possible. On the social side, buildings should not be dangerous for their occupants. Health and wellness is a fundamental objective for all buildings. This is provided when there is adequate ventilation, and thermal comfort. Ample natural lighting is also considered necessary, along with other features.
“Social” also includes responsible labor practices, such as fair, or competitive, wages, safety protocols, respect for employees and implementing diversity and inclusiveness when hiring and promoting. On the governance side, we find concepts such as controls and reporting. Having relevant and pragmatic policies and procedures is essential for any organization to have a consistent level of quality and performance.
Compliance, in the form of training and auditing, ensures that the policies and procedures are implemented properly. Reporting represents the aspect of transparency, which communicates critical information to stakeholders and other interested parties. Embedded within the broad spectrum of ESG activities is the principle of ethics and ethical behaviors. Honesty, respect, fiduciary duty and compliance with rules and regulations are essential if we expect our relationships and interactions with others to be meaningful and productive over the long run.
Most industry professionals speak of the need for our real estate to achieve the triple bottom line, commonly presented as people, planet and profit. All three elements are equally important. After all, investments explicitly require a reasonable return to attract investors. While charities are supposed to operate without a profit motive, even they need a steady inflow of funds to support their ministries. Embracing ESG principles and practices enables an investor, or manager, to generate the best sustainable returns on the investment.
I’m looking forward to the day we can differentiate between ESG as a fundamental business practice, and impact investing as a socially driven investment product. Until that happens, I fear we will continue to see confusion and disagreement with respect to ESG, and its importance to real estate investments. Therefore, it’s incumbent on us, as real estate professionals, to inform and educate our respective audiences on the true meaning and value of ESG by embracing and implementing ESG best practices in our own operations. Let’s all commit to making it happen.
Nicholas E. Stolatis, CPM®, RPA®, LEED-AP BD&C is a principal of EPN Real Estate Services, Inc., leading the asset management and sustainability practice for the firm. He previously served as Senior Director-Global Sustainability and Enterprise Initiatives at TIAA, where he created the award-winning Global Real Estate Sustainability Initiative and supported the firm’s CSR and Impact Investing platforms. Prior to that role, Nicholas was a Regional Director, in charge of asset and portfolio management for a diverse national portfolio of investments representing all asset classes. He’s the Immediate Past Chair of the Board of Trustees of the Building Owners and Managers Institute International (BOMI), the current Treasurer, and Past President of the Greater NY Chapter of IREM and one of 18 global SMEs on the Standards Setting Committee of the International Property Measurement Standards Coalition (IPMSC).