In recent years, the focus of organizations has undergone a metamorphosis. Although still driven by the continuous need to achieve greater profitability and expansion, there is now also an undeniable shift towards values and environmental consciousness.ESG (environmental, social and governance) investment strategies have been labeled as ‘investing with a conscience.’ Years ago, ESG strategies were believed to be damaging to a company’s ROI (return on investment), but such an outlook is a misnomer and in reality ESG solutions are proving market-beating.
In 2020 alone, investors held assets worth over $17 trillion selected on ESG standards.
What is ESG criteria?
ESG criteria covers a set of standards that show the dedication of companies and investors.
A devotion to the environment and planet. Companies proactively release carbon and sustainability reports. There is a strong focus on limiting harmful chemicals and pollutants. The push is to tackle climate change head on by reducing greenhouse gas emissions and using more renewable energy sources such as solar and wind.
Displaying social consciousness in the way that an organization manages their relations with communities, customers, suppliers, and employees. The organizations show a dedication towards operating with an ethical supply chain. They often support diversity and LGBTQ communities. Firm policies are in place against sexual misconduct and there is a strong focus on employee needs like childcare and fair wages.
The leadership role of organizations as it relates to internal controls, audits, shareholder rights, executive pay, and more. Companies value corporate transparency and diversity. They often employ a CEO that is independent of the board chair.
The growth of ESG
ESG investing is known by many names, such as
- Socially responsible investing (SRI)
- Sustainable investing
- Impact investing
- Responsible investing
A report released by Global Sustainable Investment Alliance shows that ESG investment strategies grew to more than $30 trillion in 2018 and are projected to top $50 trillion in the next twenty years.
The strategies being used are not new, such as impact investing, but the demand by shareholders for action is growing and becoming hard to ignore. Companies that fail to take notice of their ESG rating and make the necessary changes are more than likely to experience serious ramifications.
Organizations must be ready to carefully evaluate the metrics using ESG data and integration to gain a clear picture. With such a process, stock is evaluated factoring in ESG and compared to traditional metrics such as cash flow and capital allocation in an effort to develop an ESG-focused investment approach that will include specialty funds (not including stocks on controversial tobacco or fossil fuels) and exchange traded funds (ETF) to track indices.
There is some debate about the definition of ‘ESG’ and clearly the interpretation is open to debate and the variety of factors make it more difficult and wide ranging. Businesses are grappling with the evolution of ESG investing. Attitudes are changing with Gen Z and millennials who are more environmentally conscious taking the wheel as the older generation steps down.
ESG is here to stay and grow stronger. Bank of America projects that another $20 trillion in ESG funds will take place making it become what they have coined a ‘tsunami of assets’. Think about a comparison – the value of S&P 500 is only $25.6 trillion.
Investors are now taking notice of ESG criteria when evaluating companies for potential investment. Mutual funds, robo advisors, and brokerage firms are even offering products that utilize ESG criteria. The practices also help potential investors avoid organizations that might display a greater financial risk due to their environmental practices.
Mutual fund companies and brokerage firms are now pushing ETFs and other ESG criteria focused financial products. The robo advisors of Betterment and Wealthfront, have launched a strong focus on ESG to appeal to investors. In 2020, the US SIF Foundation had investors that held $17.1 trillion in assets that were picked based on ESG criteria which is up from $12 trillion from two years previous.
History of ESG and the future
In 2004, the idea of investing in broader ESG emerged. At the time, it was the exception but now it has become far more commonplace. Currently, there are 2,250 money managers who are overseeing about $80 trillion in assets with Principles for Responsible Investment which is backed by the United Nations.
Many were concerned that the approach would hurt profitability, but research has shown that to be a non-issue. There are many ways to enact ESG style such as buying ESG-focused ETFs which track indices. Data has shown that the yield is similar - examples include, Nuveen ESG Large-Cap Growth and iShares ESG MSCI USA which both beat S&P 500 in the last year.
The influencers of ESG
Virtually everyone believes that improved returns make it easier to pick the best companies for investors to invest in, believes Cliff Robbins, founder of $2.2 billion hedge fund Blue Harbour Group. Robbin went on to state at his “Delivering Alpha” address in September, “I think it’s so powerful. I’m telling public company CEOs that I’m investing in today that three years from now their P/E is going to be affected by their ESG rating.”
Investors seek out ESG strategies for a number of reasons. The primary factor that is influencing ESG integration remains financial performance. Some investors feel a moral obligation and will not even consider companies that do not share their values or point of view. However, the majority take a hardline look at ESG from a purely financial risk perspective.
Here is one example: a business that fails to take the initiative of providing equal pay will probably experience a high employee turnover rate which impacts their performance and negatively affects their stock value.
The popularity of ESG strategies is not without issues. It’s often hard to assign any type of ESG score to an organization because so many factors are simply subjective.
I think it’s so powerful. I’m telling public company CEOs that I’m investing in today that three years from now their P/E is going to be affected by their ESG rating.
The case for ESG
Let’s examine inspiration for ESG strategies and the objectives. Why does it seem like everyone is jumping on the sustainability bandwagon lately? What is the driving manifesto? The answers do vary and sometimes not a single answer fits but it is a combination of two or more factors.
Attracting ESG investors
The 2020 State Street Advisors ESG report showed the following statistics on what attracts investors.
- 75% believed that sustainability performance functioned as a critical decision component.
- 76% looked at legal requirements and compliance with regulations.
- 77% outlined a belief that ESG will continue to play a critical role in broad financial performance.
- 78% felt strongly about the social and environment impacts of ESG.
- 79% of investors looked at the ethos values and ethics involved.
Despite the best intentions, everything usually boils down to expanding the bottom line. Around 75% of executives believe that sustainability performance should be a cornerstone of investment decisions but only 60% report that they believe investors genuinely care about sustainability.
Compliance to ensure a healthier planet
With laws and regulations focused on limiting emissions and waste to alter climate change, the finance world is now requiring that big companies and corporations disclose their preparation plans.
In 2016, the Wall Street Journal reported that pressure has increased from the Securities and Exchange Commission (SEC) to ensure that financial and government communities put effort into developing standards that disclose their ESG practices and data plans in their corporate filings to achieve greater transparency.
Organizations are being pushed to operate in the new business environment with a greater emphasis on accountability to foster a healthier planet for future generations.
Attract stellar talent and exceptional tenants
Commercial real estate businesses have the potential to achieve more revenue if they have energy efficiency certification. In the McGraw-Hill Construction survey, it was found that the survey respondents showed that green retrofitted space commanded a premium price.
The CoStar study which examined the Los Angeles CRE market noted that buildings that boasted ENERGY STAR certifications and LEED sold for higher than the asking price and achieved higher lease rates. The JLL Global Research report found that rent and sale prices increased 5.4% and 11.6% respectively.
Morgan Stanley conducted research that showed the importance of sustainability to millennials in the workforce. They found that millennials were three to four times more likely to seek employment with organizations that share their values and moral stance on social and environmental issues. Businesses that can show progress towards greater sustainability are becoming exceptionally successful at recruiting and retaining skilled talent.
Offers better ways to operate
ESG performance data provide tools that help ensure that the building is managed better than others which renders a positive impact on value. Portfolios with technology offer better insights into performance which helps organizations make confident data-driven decisions, enjoy greater cost-saving opportunities, and open doors for capital investment projects.
Data automation, energy intelligence software, and building automation systems all work together to provide greater control over a building’s operations.
Implementing an ESG strategy
If you are planning on implementing an ESG strategy, you’ll want to consider the following steps. Of course, you’ll want to make your own adjustments to tailor things to your organization’s particular needs.
Figure out your target goals so you can outline a clear definition of how sustainability impacts your organization and what ESG will mean. What is the level of ESG within your organization? Once you know the mindset then you can figure out a strategy to foster engagement and meet your goals. Remember there is no one size fits all. What works for one company might not for another.
Consider the following:
- Needs of investors, owners, joint venture partners, peers, and shareholders
- Identify the ESG obstacles, implementation time, and finances.
- Use an ESG performance report to determine the potential value
- Think about your performance-based targets
- Evaluate your long-term strategy and goals.
Ask and answer the following questions:
- What are your goals?
- Do you have any identifiable business models?
- How do you plan on communicating your long-term aspirations?
- What is your vision for a successful end result?
- Where do you foresee things going?
- Do you plan on adopting novel approaches and implementing them?
- Have you determined your project holding time for property? Will it be a long-term hold or a three-year ownership (which each yield outcomes and hinge on different sustainability initiatives)?
- What is the financial goal?
- What timeline have you set?
- Do you have any current challenges?
- Will sustainability create value for your company?
- What are your stakeholders’ goals?
- What is your ROI driver?
Once you answer the above questions, you’ll create a firm foundation and can go to the next steps needed to build a successful strategy.
Formulate a budget
Create a realistic budget by considering your goals and timeline. Will you be getting funding? Do you have an idea of how much you plan on spending?
Weigh your ROI tolerance and think about whether you need a return in ten years, three years or one year. What are the drivers? Is your goal energy cost reductions or do you want certifications such as ENERGY STAR or LEED? Your goals will help form an adequate budget. Depending on your budget, you might have to alter your goals.
Budgeting starts with an ROI analysis but there is usually more to consider such as:
- Determine if your organization is willing to go after capital improvements or initiatives, or if you want to attract investor stakeholders which are all factors that bring benchmarking initiative to the center stage.
- Recognize your revenue savings.
- Consider your team's availability. Will you need to hire a consultant to continue making progress or do you have a skilled in-house team who will manage things?
- ESG audit considerations give a picture of potential improvements that are available and what ROI they can provide.
- Determine the value of improvements and cost perspectives
- Factor in the availability of your team track and maintain ESG reporting, initiatives, and disclosure projects.
- Consider capital improvements and how they will push the future savings potential.
Weigh your opportunities and the future forecast
Data matters so use ESG reporting framework to give yourself insight into energy efficiency.
You’ll want to identify the leading and bottom rung performers in your portfolio. Also, conduct an ESG performance assessment and audit. Managing, aggregating, and obtaining reports on all utility data can be a time-consuming process but is a necessity so you can understand the differentiators and round out your portfolio.
Data automation technology effectively collects and helps to validate your information so you can quickly identify all performing assets. You’ll have the insights you need to focus on initiatives, metering, retro commissioning, energy auditing, demand response and more so you can truly foresee potential ROI.
You’ll want to figure out if your organization can effectively prevent energy drift in buildings. The US Department of Energy’s Lawrence Berkeley National Laboratory conducted a study that showed that energy drift is an imminent degradation of the building’s energy efficiency that can occur as a result of construction defects, design flaws or equipment malfunctions that might arise as a result of something as simple as natural wear and tear. The study revealed that degradation can be as severe as 10 to 30% in a one- or two-year time span.
Thanks to advancing technology, organizations can turn to tools and platforms to analyze all data from equipment sensors, energy meters, building automation systems, and potential site-level employees who might waste energy in the buildings.
Taking an initiative-taking approach towards all building maintenance and providing staff with the knowledge needed to identify and perform issues are all going to increase costs but can definitely push sustainability performance, and lower utility and maintenance costs. The final result is to provide a better experience for the building’s tenants.
No one has a crystal ball, but with analytics and data, you can continue to stay ahead of operational and energy trends.
Build an ESG framework
If you have completed the first steps, then you have the information needed to truly start fleshing out your ESG framework. Companies with impressive ESG initiatives usually have impressive financial performance that renders greater investment value coupled with higher returns. A detailed strategy is attractive to investors.
The Harvard Business Review states, “90% of 200 studies analyzed conclude that good ESG standards lower the cost of capital; 88% show that good ESG practices result in better operational performance; and 80% show that stock price performance is positively correlated with good sustainability practices."
A high GRESB (Global ESG Benchmark for Real Assets) provides a much more impressive argument for investment than a lower performance.
Addressing regulatory concerns
Depending on the location and size, city or regional benchmarking ordinance compilation might be required You might need to reach out to outside consulting groups and use various platform tracking tools, products, and services to stay abreast of new regulations as they occur.
Benchmarking and certification standards
Sustainability certifications and ESG ratings for companies are all factors. The certifications offer third party designation which are recognizable and offer direction. Trending and well-established certification also help add substance to your portfolio ESG program.
Forming a sustainability team
Will you be building your own team or outsourcing? Also, you’ll want to secure stakeholder buy-in.
With a steadfast plan, it's time to start building a team with either internal staffers, a consultant, or skilled outsource team. Consultants often offer greater efficiencies when it comes to understanding and completing some certifications, Plus, they can also provide objective suggestions for additional improvements.
Buy-in had an impact on the success and launch of your sustainability plan. You’ll want to truly define your team and start to hone trust between all members. The team extends beyond the executive level. Gain greater success by engaging both your asset and property teams.
Think about the energy challenges each property faces so you can stay on track, create a point of reference, and reduce energy consumption. Your newly laid out ESG plan must be embraced at every level of your organization.
A successful team includes:
- One or more executive representative(s)
- Stakeholder representative such as tenant relations, property management, asset management or investor relations.
- Trusted in-house members who have a strong handle on sustainability
- A consultant (if needed).
ESG reporting software provides insights, so you monitor progress. You’ll want to hold meetings to continue laying out goals, keeping track of benchmarks and studying any lessons learned. Also, compare ESG performance reporting with other ESGs.
As with any strategy, it takes dedication to stay on track. You have to constantly monitor and evaluate the changing landscape to make any necessary adjustments.
Three ways to monitor progress include:
- Your portfolio might be huge, and you’ll want to show progress with your energy efficiency goals and ESG, so you’ll need a system to access all of the data and track the performance of the KPIs (key performance indicators).
- Track progress at the site-level. Ensure your facility team can access detailed information on how to continue improving energy efficiency for all individual sites. This process creates greater transparency into various buildings and projects and how team members are implementing crucial measures.
- Compare your efforts with other organizations. With certain platforms, you can benchmark your performance alongside similar portfolios. Examine other ESG reports provided publicly by large organizations. Stay up to date on industry trends, research, and developments to see how your portfolio stands up.
It’s time to promote your success and dedication to adopting ESG into our business’s core values provides many benefits. Think about how you will promote your results. Will you make the information public or maintain privacy? Promotion can occur through benchmarking such as GRESB or SASB or with an annual report. Consider your target audience and how to best reach them.
Frequent internal updates create a strong company wide goal which helps to reinforce dedication and efforts. Promotions also re-engage stakeholders, so they help contribute to your ROI.
Data reporting and modeling are useful for verifying your progress and will spur innovative thinking which can help you gain a competitive advantage.
Always be consistent with the content you provide to the public. You want your messaging and performance to show your dedication to ESG.
Use numerous multi-channel marketing approaches to promote your organization’s success and efforts .
Try the following:
- Website promotes
- Press release
- Email campaigns
Always strive to keep your actions or messages in sync. Organizations have started to seriously promote their ESG efforts and there is an increased trend with CSR (corporate social responsibility) reports that can help foster success. At this stage, investors, prospective customers, employers, and tenants all expect transparency. Third party standards such as LEED, GRESB and ENERGY STAR are all real proof of your ESG efforts and their measurable impact.
How to report ESG
Consider how your organization will report data. Manual data collection is tedious and time consuming. It is also fraught with human errors that can substantially impact your sustainability score. Investing in tools that automate the data processes is highly beneficial. ESG data vendors and ESG service providers offer various tools like automation software that simplify aggregation and all reporting processes which help save time and eliminate manual processes.
An ESG strategy is made up of metrics such as lower energy usage that have resulted from efficiency measures, greater tenant retention and lower maintenance costs. The intangible benefits are more difficult to measure but include perks like greater tenant comfort, lower environmental impact, and the power of word-of-mouth promotion by tenants.
Provide private and public value metrics which show your dedication to your ESG strategy. Private metrics are focused on the investment, investors, tenants, and property ownership. Public metrics are the impact that all parties have on our efforts and investments such as where the property is located.
Ongoing global impact of ESG
ESG has become impossible to ignore. Isn’t it time to embrace sustainable practice and bring ESG awareness to your business strategy?
Undoubtedly, ESG is becoming mainstream, and the next decade is going to see an even greater flood of shareholder driven accountability from almost all major global companies. The public, employees, and investors are starting to demand action from corporations and ESG metrics are taking shape and becoming exceptionally transparent.
“The largest investors in the world, which control how stocks are ultimately valued, care about this. Endowments and foundations are totally focused on ESG considerations … pension funds care about it, labour unions care about the safety of their employees … the biggest asset managers in the world have now awoken and said ‘ESG matters to me,’ and therefore it’s going to matter to companies,” concludes Cliff Robbin of the Blue Harbour Group.
...the biggest asset managers in the world have now awoken and said ‘ESG matters to me,’ and therefore it’s going to matter to companies.”