CRE Companies Hunt For New Ways To Meet — And Quantify — ESG Goals
As the drumbeat grows louder for corporate citizens to adhere to the three pillars of environmental, social and governance responsibility, the criteria to judge companies on those fronts remain abstract.
The longest-standing and most basic reason to pursue ESG-related goals — the moral or altruistic angle — has rarely been enough to shift a company’s focus away from its profit goals. In recent years, more arguments have been made that ESG-focused behavior can improve returns. Perhaps just as important to corporations is fear of negative perception, which has grown at least as much as the profit argument.
It can be difficult for a company to produce concrete evidence that it is fulfilling ESG principles, but it is a bit more straightforward in the real estate industry than some other sectors of the economy, especially when it comes to environmental sustainability.
A landlord or property manager can point to measuring sticks like Leadership in Energy and Environmental Design or the Global Real Estate Sustainability Benchmark as proof that it is doing more than the bare minimum to reduce energy or water usage, emissions and waste. For social and governance issues, companies like Crown or Brandywine Realty Trust can cite initiatives and programs they have undertaken, but have little way to compare their impact.
“We do outreach, we work with local businesses to make sure we’re working within the communities, and we always try to be a good corporate citizen,” Brandywine Realty Trust Senior Vice President of Operations and Sustainability Ron Becker said. Becker joined Brandywine in August after a handful of years at Federal Realty Investment Trust in a similar position.
Crown and Brandywine both say ESG is central to their respective corporate identity, with Becker being the avatar for Brandywine’s efforts and an internal sustainability analyst doing the same for Crown.
“The great thing about Brandywine is that our whole team is committed to ESG,” Becker said.
Among Brandywine’s claims to social responsibility are a partnership with Philadelphia-based nonprofit The Enterprise Fund to give low-interest loans to local entrepreneurs, and its Construction Apprentice Preparatory Program to funnel potential workers into skilled and organized laborer positions.
For its holdings in the Toronto area, Crown engages with Smart Commute, a program that connects commuters with potential carpool partners and transit alternatives.
Though Becker said ESG is taken more seriously than it was five or six years ago, he couldn’t name any specific day-to-day differences in his job between now and then. Rather, he described a constant mindfulness throughout his business of the day as the way he approaches ESG questions.
“It’s not like I have to split my mind to think about one and then the other,” Becker said, referring to profit and ESG. “It’s a frame of mind that’s becoming more and more common in the industry. I want everyone to understand why we do things so we have a more educated consumer, which in this case is my property management team. Obviously we want our tenants to understand what we do as well.”
The third part of ESG is the one that observers outside a company have the least visibility on, and is the toughest to identify in specific behaviors.
“There’s not a lot of radical change that will go on in the governance sector; it’s really about the mindset,” Becker said, adding that Brandywine’s legal team primarily handles governance issues.
A central component of good governance is transparency, giving Brandywine a shortcut as a publicly traded REIT that submits federally mandated, quarterly financial statements. For a private company like Crown, good governance is a difficult thing to observe directly.
“While we are private and entrepreneurial, we also act as a fiduciary and invest alongside our institutional investors,” Hanna said. “As a result, governance is a top priority and we are held to institutional standards — our commitment to these standards is evidenced by our long-standing institutional relationships over many funds.”
The question of investor influence over ESG matters looms large over the present moment. Nearly $18B of capital has flowed into funds designated as ESG-focused this year, more than triple the amount invested in 2018 or 2017, according to Morningstar data reported by The Wall Street Journal.
A fair portion of those funds have investments into fossil fuel companies with spotty environmental records, which has prompted the Securities and Exchange Commission to begin exploring the issue and asking for information on how such funds form and pushing them to implement ESG standards, the WSJ reports.
The influx of investment into ESG is not purely driven by altruism, despite how urgent matters like climate change appear to be. Hanna and Becker agreed that advances in green technology as well as data reporting have made the return-based case for sustainable investing much easier in recent years.
Having bona fides like the five-star rating from Global Real Estate Sustainability Benchmark that Crown secured earlier this year may be a leg up for securing capital from a pool of investors that has exploded in the past year. That in itself has added motivation for companies to make its ESG efforts more explicit and concrete.
“We had to learn a little about what benchmarks the investment community focuses on, and GRESB is something that would be tracked by institutional investors looking for the best managers with whom to invest,” Hanna said. “It’s more the investment world now that has started to place importance on benchmarking and good governance in less of a vague way.”
As time goes on, the matter of ESG will gain importance as younger generations more convinced of the imminent dangers of climate change grow their presence and influence in the workforce and economy at large.
“People have found that there are more avenues to create monetary value, but it’s also the new generation that’s coming up, the millennials for whom it’s important,” Becker said. “And they’re going to be 75% of the workforce at some point.”