Environmental Social Governance Integration – Moving Beyond RFP Box Checking
by Ben Kraus
ULI New York hosted a presentation and panel discussion titled Does Environmental & Social Governance (ESG) Help Real Estate Investors Decide?, which explored the current state of ESG across the real estate industry, the key metrics used, and how practitioners are integrating this data into core business and investment decision making processes.
“The tie between real estate investment performance and ESG performance is fairly established,” stated moderator Ari Frankel, who is the Head of ESG Strategy, Real Estate at Deutsche Asset & Wealth Management. “To move forward, we need to get beyond box checking, and start thinking about what we can do with ESG information, how we can integrate it, as that’s where investors are looking to make progress.”
In recent years, research has shown that entities that have integrated ESG principles have less risk occupancy in their investment portfolios, and investors have become savvy to this “triple bottom line” approach. Request for Proposals (RFPs) soliciting investment management services have been increasingly probing firms to disclose their ESG practices and successes, posing questions such as to what extent are these principles being integrated, how are they impacting returns, and if so, by how much.
To adequately address client concerns, managers have become reliant on a myriad of metrics that attempt to quantitatively and qualitatively measure ESG performance. Frankel specifically cited Leadership in Energy and Environmental Design (LEED) and Energy Star as effective tools for assessing sustainability performance at the asset level, and when analyzed in conjunction with Global Real Estate Sustainability Benchmark (GRESB) data, managers are able to paint a clearer picture of how well their firm is integrating ESG into their overall business strategy and where they can improve.
However, effectively employing these tools is not without its hurdles.
“A main challenge is translating the amount of quantitative data to the performance metrics of individual investments,” said panelist Jennifer Young, Principal at The Townsend Group. “Because many of us are focused on collecting predominantly fund level information, our challenge is the collection and issuance of property level information, and rolling that into the firm level ESG assessment.”
Other panelists included Cherie Santos-Wuest, Principal Investment Officer for Real Estate at Connecticut Retirement, Pension & Trust Funds, and Nicholas E. Stolatis, Senior Director, Global Sustainability & Enterprise Initiatives of Global Real Estate at TIAA-CREF, who both emphasized the importance of ESG integration.
“ESG is a tool that we use to mitigate and identify risks in our investment portfolios at the property and fund levels,” said Santos-Wuest. “As an investor, you must ask the question: do you want to invest in that company that has manufacturing facilities polluting the Amazon? Think about what that does to the value of your equity.”
Similarly Stolatis stated that as a fund manager, one should be asking what is most important from the investor equity standpoint, in terms of ESG. He stressed that one “should be able to show how ESG practices generate value to the client, not just answer questions on an RFP.”