Over the last few years, global concerns about climate change and business ethics have brought forth the need for businesses to focus on environmental, social, and governance (ESG) issues and their associated risks. Sustainable, and environment cautious business practices have become more prominent in overall corporate strategies – addressing concerns on climate change, business ethics.
While opinions about ESG often get restricted to issues surrounding climate change and pollution, the concept itself has more far-reaching goals. The ‘social’ pillar of ESG focuses on businesses’ responsibility towards labour practices, talent management, and other stakeholder relations – while the ‘governance’ pillar focuses on ethics, leadership diversity, and the provision for providing livable wages.
For businesses functioning in the real estate sector, the need to imbibe ESG principles is not just a moral imperative, but also a fiduciary responsibility. With increased scrutiny on ESG, CRE stakeholders need to understand, improve, and leverage their performance on this front to drive value and stay competitive.
The essential question is no longer what to do, but rather how to do it.
Planning from the ground-up
With the growing understanding of ESG, the real estate sector has started imbibing these strategies into its overall corporate functions. What’s essential, is the need to incorporate ESG across the entire real estate lifecycle.
During the planning phase, occupiers should conduct due diligence on the environmental factors that will either help or hinder their business operations and ESG goals. Understanding these factors up front, as well as the associated risks can help occupiers make educated decisions at a market and property level that will make it easier for them to do business in the future.
The number of companies that acknowledge the risk of climate change in their financial reporting has increased significantly since 2017. From a macro perspective, occupiers can take climate change risk into account when choosing what market, and even submarket, in which to locate operations. The frequency and severity of natural disasters can have vast implications on building operations and is part of the risk profile that occupiers aim to understand before choosing a location. Being educated about, and mitigating against, these risk is a critical factor in planning to ensure continuity of operations in the future.
Other opportunities might exist within special business improvement districts that seek to achieve sustainability goals and to align their efforts with those of local businesses. Sustainable operations are also becoming more sophisticated and may require facility managers and engineers to upskill their education in this area.
Perhaps the most key consideration in this area is simply understanding how the facility measures up to best practices in terms of sustainability, creating measurable actions in turn and monitoring those actions to pave the path for a more sustainable future.
The social spotlight
Companies and CRE leaders can revitalize and transform communities by being deliberate with a real estate strategy that not only encompasses facilities and space but also incorporates the community. The recognition that well-capitalized businesses have a shared responsibility in the communities where they operate is common today.
These companies can support the strength of their community by creating an interconnection with local leaders and businesses to drive positive outcomes.
Similarly, connecting employee health to the built environment is now a business essential. While the long-term effects of the pandemic remain to be seen, the ‘built’ environment will play a key role in promoting and maintaining healthy behaviours. Organizations like WELL and Fitwel and principles like Harvard’s “The 9 Foundations of a Healthy Building” help owners and occupiers assess and improve the quality of their building environment.
What’s next?
In Asia and Africa, the total building stock is expected to double by 2050. In addition, the material used is expected to more than double globally by 2060, with building and construction to account for a nearly one-third share. Hence, it will be important for the building and construction sectors to inculcate ESG practices throughout the lifecycle of the projects for a sustainable future.
Measuring organizational success is evolving to include not just financial performance, but also how companies perform against ESG objectives. The task of fully integrating these issues into corporate business strategy is complex and will require the commitment of time and resources, as well as partnership with multiple stakeholders.
As we look to the future of ESG and the corporate real estate agenda, additional considerations for
occupiers might surface:
- Technology will play a key role in creating significant and long-lasting change within investors’ practices and portfolios by enhancing the collection and reporting of ESG data. These technologies include data management platforms to store and process ESG data, monitoring platforms to streamline ESG review and delivery processes, and PropTech-based platforms to enhance tenant experience.
- The convergence of a more pressing ESG agenda with new working arrangements represents both a challenge and an opportunity for corporations. As new norms around working patterns and business travel start to become established, the role of remote and flexible work arrangements will evolve for occupiers. One consideration for the future will be whether these arrangements will offset carbon footprints and have a positive impact on energy management.
- Against the backdrop of the target to reduce carbon emissions from the built environment, energy audits are expected to play a critical role in conserving energy and cost savings. These audits go a long way in identifying and designing cost-effective energy savings opportunities.
As we move forward to a more cautious business landscape, incorporating ESG into the heart of the planning process will create the building blocks of a strong strategy.