It is becoming increasingly apparent that Environmental, Social, and Governance (ESG) considerations are at the forefront of Investors’ minds. ESG and sustainability considerations are becoming a focus throughout all stages of the investment process. Considering the current events and how ESG factors are shaping the ways we live, in October, world leaders met at the United Nations Climate Change Conference in Glasgow, Scotland, to address the issue at hand. Numerous Investment Managers and hundreds of Investors have made the pledge to commit to net zero carbon. CBRE highlighted key trends influencing Investor strategies in 2021 and beyond, many with ESG considerations taking the lead. A recent study by the Harvard Business Review concluded a third of all professionally managed assets, roughly $30 trillion, are now subject to ESG criteria across the globe.[1] While the list of sustainable initiative efforts grows exponentially, Diversity, Equity, and Inclusion (DEI) initiatives are also moving to the fore in our industry.

We would like to thank Sarah Welton, Business Growth Director, at Longevity Partners and Zoe Hughes, Chief Executive Officer of NAREIM for their contributions to this article, given their extensive knowledge and expertise in the ESG space.

ESG: WHAT DOES IT MEAN?

ESG is divided into three main components: Environmental, Social and Governance. It is the set of criteria Investors employ to keep their portfolios as socially responsible as possible. Environmental factors, those related to the consumption of natural resources, are often the easiest to define and
measure. Such factors commonly include resource use, energy consumption, hazardous waste, carbon emissions and climate change. The lines between the Social and Governance factors are often more blurred. Social, the human factor of ESG, includes variables related to an organization’s
stakeholders. Common areas of the social component include Diversity, Equity and Inclusion, health and safety, and community relations. The final component of ESG, the ‘G’, refers to Governance, those factors related to the structures and systems in place to ensure effective direction and control. An organization’s policies, processes and practices are common items considered when analyzing this component as part of the ESG framework.

When measuring the impact of ESG, it is common for firms to focus directly on the Environmental component of the equation because such metrics are easily defined and measured. How has your firm cut back on Carbon? What steps has your firm taken to reduce energy consumption? How do you measure total water consumption? Has your firm taken steps to measure hazardous and nonhazardous wastes or resilience in relation to climate hazards associated with physical assets and geographic exposures? Additionally, reporting initiatives such as the UN Sustainable Development Goals, GRESB, the Task Force on Climate-Related Financial Disclosures (TCFD) and the Carbon Risk Real Estate Monitor (CRREM), among others, allow managers to collect, standardize and benchmark their ESG data and performance. It is very transparent for Investors to evaluate how many assets in an Investment Manager’s portfolio have ESG accreditations. The Investor can determine how many assets are LEED certified and whether certain assets in the Investment Manager’s portfolio rank in Energy Star Ratings.

Our friends at Longevity Partners shed light on the connectivity of the three components of the ESG equation. “All of the environmental sustainability standards and rating systems seem to be acknowledging the importance of and connection to social sustainability,” says Sarah Welton of Longevity Partners. “Nearly eight years ago, the WELL Building Standard was released to provide a performance-based, third-party verified way to evaluate real estate well-being strategies, which has prompted the other sustainability rating systems to elevate the consideration of health and wellbeing. And recently SASB convened a working group on evaluating how to better account for human capital in its materiality matrix.”

We acknowledge that the E comprises a substantial part of the ESG framework, but it is important not to overlook the S and the G. “There is an intrinsic link among all three variables,” indicated Sarah. “While addressing environmental sustainability is imperative for every organization, attention should also be paid to an organization’s governance and social considerations, as they directly affect the people who make up an organization and who occupy its real estate, and therefore impact the valuation of the firm and its real assets.” Below, we discuss how to measure the Social and Governance components and why tracking these metrics is crucial to a firm.

ESG: SOCIAL & GOVERNANCE

We often receive questions about how to adopt metrics related to social and governance attributes at the corporate and investment level. Below are some ideas about how to remain thoughtful about this when establishing or improving an ESG Policy. It is also critical that partners are aware of these policies and are willing participants in the GP’s outcome.

Governance Aspects

The G in ESG refers to those policies and procedures that shape an organization’s governance practices. Does your organization have a set of established guiding policies and procedures? Such efforts are critical for ensuring a firm has effective management, risk identification and mitigation processes and alignment of interest. Typically, these policies are built around the following Policy initiatives: 

• Code of Ethics
• Compliance & HR Staffing and Monitoring Processes
• Sexual Harassment Policies
• Responsible Contractor Policies
• Disclosure and Mitigation of Potential Conflicts of Interest

 It is also essential to promote good governance by ensuring diversity in decision-making processes and leadership roles. Ask yourself the following questions:

• Is your organization actively recruiting diverse talent?
• Does your organization include diverse backgrounds in the decision process?
• Are you including a wider team from the organization, including diverse specialties such as Acquisition, Portfolio and Asset Management professionals?
• Do you track and report diverse representation on your Investment Committee, Management Committee and Independent Board of Directors?
• Do you have rotational policies of key decision-makers in place?
• Do Committee Members have term limits? If not, how and under what circumstances do you consider new additions to the decision-making committees of the organization?

Social Aspects

To define the Social metrics, below we list the initiatives a firm should consider as they establish and measure Social goals. Initiatives such as those outlined below, serve to improve a firm’s value chain, promote business continuity and increase retention and employee engagement.

Corporate Social Measurements:

• Diversity, Equity and Inclusion Policy
• Education and Continued Training on Diversity, Equity and Inclusion
• Workforce Composition Statistics
• Corporate Charitable Giving/Matching
• Community Event Participation/Sponsorship
• Employee Volunteer Hours
• Office Occupancy Satisfaction
• Overall Employee Satisfaction Surveys
• Declining Trend in Employee Turnover
• Parental Return to Work Rates
• Pay Equity Study

Diversity, Equity and Inclusion are at the center of the Social component. It’s critical for a firm to establish policies and procedures around Diversity, Equity & Inclusion to provide stakeholders a framework to guide decision-making and shape behavior. Firms need to begin by ensuring they have a DEI Policy. The next step is to consider how often DEI Policies are formally reviewed and updated to reflect new guidance on best practices. Once a strong foundation is established, it is important to routinely evaluate the success of the policies through key performance indicators (KPIs) and employee engagement. How can an organization successfully track such measures? We have provided below a sample of KPIs to evaluate the diversity of the organization.

• What percentage of the firm is owned by individuals with a diverse background?
• What percentage of the firm is comprised of women and minorities?
• What percentage of the firm’s senior management is comprised of women and minorities?
• Do imbalances exist in the composition of departments within your firm?
• How frequently does your organization track DEI in evaluating its workforce composition?
• Are workforce composition statistics updated on a frequent basis?
• Are workforce composition statistics reported and reviewed by Senior Management?

Once a policy has been established, consider the initiatives your organization can pursue to promote a diverse workforce and confirm if goals have been established to assist with such efforts. Your organization's recruitment process should align with its DEI goals to bring diverse talent to the organization. A periodic review of hiring initiatives should be conducted to measure whether recruitment efforts promote diversity.

• Is your organization actively recruiting diverse talent?
• If so, what steps are being taken to promote diverse recruiting efforts?
• Is your firm affiliated with any organizations, such as Toigo Foundation, that you leverage to promote recruiting? Does your firm take part in scholarship initiatives?

The industry is taking steps to help firms better track such measurements. The Global Real Estate DEI Survey is the industry’s first global collection of corporate best practices and employee demographics for commercial real estate. The Survey tracks gender, race/ethnicity and nationality across seniority and job functions in Asia-Pacific, Europe and North America as well as corporate practices in relation to DEI programs, recruitment, retention, training and development, inclusivity and pay equity. The 2021 Global Real Estate DEI Survey, a partnership between ANREV, INREV, NAREIM, NCREIF, PREA, REALPAC and ULI and conducted by Ferguson Partners, collected 175 responses covering 435,000 employees globally and representing $2.4 trillion gross assets under management.[2]

“The measurement of diversity, equity and inclusion practices in the workplace is only one small part of the S in ESG, but it is critical. Without a benchmark, without data, how can we track progress? How can we strive to improve the composition of the industry and increase opportunities for all, if we don’t know where we began?” indicated Zoe Hughes of NAREIM. “That’s why benchmarking surveys such as the Global Real Estate DEI Survey are so important. Supported by seven CRE associations, this Survey is the start of the industry collaborating, proactively, on DEI – where we all share data and information on where we stand currently within our organizations, and what is working, and what is not working. Without that sharing of ideas and best practices, we do not learn from one another and we all lose out. But together, we all become stronger and we all improve.”

Further, assess how your organization is retaining its staff. Although it is key to highlight diversity in your recruitment efforts, the firm must also train and guide its staff to build careers over the long term. Internal and external training and mentorship efforts are crucial elements that contribute  to diverse talent's career development.

Additionally, there are a number of elements managers can track on the property level. Sarah Welton of Longevity Partners identifies the importance of tracking Investment Level Social Measurements. “Thoughtfully integrating health and well-being strategies into the development and management of real estate is not only a smart way to give people the confidence to re-enter shared spaces, it can also increase rental revenue and decrease cap rates, and therefore improve real estate valuations.”

Investment Level Social Measurements

• Investment Strategy Considerations
• Global Impact
• Affordability (Rent Regulated, Unregulated, Workforce Housing)
• Opportunity Zone
• Sustainability
• Property Contributions to the Surrounding Community
• Number of Employees
• Exposure/Events with Local Vendors
• Voting Locations
• High-quality Indoor Environmental Conditions
• Opportunities to Recycle and Compost Organic Waste
• Inclusive Characteristics
• Public Artwork Contributed by the Local Community
• Health & Well-Being Property Attributes (outdoor fitness amenities, well-lit walking trails, outdoor seating)
• Community Gather Space

CONCLUSION

A comprehensive view of ESG, including strong Social and Governance policies, will set up your organization for future success. It is more important than ever to focus on ESG initiatives as all Investors, occupiers, employees and overall stakeholders are increasing their focus and commitment to ESG initiatives. At Alliance, we believe that in the future, the strongest platforms will be built on a foundation of policies and procedures that are put in place today to establish robust ESG programs.