Environmental, Social and Governance Standards
Environmental, Social, Governance (ESG) standards have taken commercial real estate owners and stakeholders on a rollercoaster over the past few years. ESG programs exploded after the pandemic, and by 2022, Morningstar reported that 90% of companies had adopted an ESG strategy. Recently, however, ESG has become a polarizing and politicized concept, dividing companies and complicating strategies. A new perspective can help companies move forward.
The Turning Tide
In the last year, ESG-critics have stalled adoption and growth. Currently, there are 61 anti-ESG bills pending in state legislatures, with the most in Oklahoma, South Carolina, Missouri and West Virginia. In addition, anti-ESG EFTs have emerged to specifically exclude companies that have ESG standards, practices and targets. On the flip side, other states are introducing pro-ESG legislation to intensify regulations. Overall, 46 states have some form of ESG legislation pending, creating a challenging regulatory environment for real estate owners, particularly those with a national portfolio.
Anti-ESG proponents have different motivations. Some have the perception that ESG reporting doesn’t represent information that is material to investors and therefore shouldn’t be an investment metric. Others believe it is greenwashing, while other critics believe it is part of a political agenda. It is important to cut through the noise and focus on the critical components of ESG—which are not political but rather a data-tracking effort to gain deeper insights into property or portfolio performance. This type of data strategy can satisfy a wide variety of stakeholders, including those who are agnostic to ESG and those requiring or driven by ESG metrics.
A New Approach to ESG Strategy
ESG data can help investors and owners unlock valuable insights into a property’s performance. It can help provide a full property overview to illuminate information about energy usage and a property’s impact on a community. When investors leverage actionable data insights, the information can be used to direct investment strategy, mitigate risk factors and target operational spending to improve investment performance.
The best ESG programs incorporate flexible solutions to track, report and provide data to a broad group of stakeholders. In addition to setting clear goals and KPIs to track, companies should have a standardized system to collect internal data – including energy usage, workforce diversity, supplier and vendor management, and building materials – and provide transparent reporting to stakeholders. The program should allow for expansion as new metrics move into the spotlight. In the near future, property stakeholders will likely be interested in other information related to subjects like local taxes, insurance maps and disaster zones. These datasets can simply provide deeper insights into a property to determine all of the benefits and risk factors of the investment. Being able to quickly adapt and provide those additional data points to stakeholders will likely be the key to success.
At its core, ESG is simply a process of tracking and reporting data to inform external stakeholders about the performance of an individual asset or a portfolio. By developing a strategy based on delivering important data to stakeholders, companies can focus on satisfying stakeholders and investors who are both pro- and anti-ESG. Afterall, utilizing data effectively to eliminate blind spots and drive better returns is the ultimate goal with all asset data.
