The business case for ESG. Shouldn’t it just be business as usual?

Environmental Social Governance (ESG) refers to “the three central factors in measuring the sustainability and ethical impact of an investment in a company or business”. These factors are becoming increasingly important investment considerations.

Since 1970, there have been more than 2000 academic studies seeking to identify if there is a link between ESG and financial performance[1], this really isn’t a new subject. The findings demonstrated high ESG ratings and strong sustainability practices. These correlate to better financial performance across multiple asset classes and regions.


ESG and Fund Performance

Recent award-winning research found that “sustainable” Real Estate Investment Trusts (REITs) benefited from higher rental income and lower interest expenses, resulting in an increased cash distribution to shareholders [2]. A lower risk profile was also identified attracting higher premiums to Net Asset Value (NAV). Transparency through public disclosure was found to be a key facilitator of driving improvement.

GRESB is one of the most popular voluntary certifications for private Real Estate portfolios. Research shows that strong GRESB performance correlates to enhanced fund returns for non-listed funds. Overall, a 3% fund return uplift was observed between the lowest and highest GRESB scoring funds.

Both these examples demonstrate the level of impact ESG is having in the real estate sector. More companies are taking this seriously as it makes economic sense with increased profitability, social sense through the implementation of ethical values and environmental sense through reduced ecological impact.

People & Planet Before Profit

There have also been recent surveys, highlighting that nine out of ten millennials believe the success of a business should be measured by more than just financial performance [3], and 60% of millennials want to join companies that have a societal purpose [4]. Added to that, climate change has rapidly climbed their list of concerns. This strongly correlated with their overall opinion of businesses. Young people and indeed our emerging workforce could not be clearer when it comes to how they expect businesses to act – people & planet before profits.

Integrating an effective strategy

Given the above benefits, it is no wonder that EVORA has been so busy advising clients on how to incorporate ESG principles into fund strategy. The key to success is developing a tailored solution that focuses on material issues and is designed to deliver value in the myriad form it can take.  From our experience, an effective ESG strategy must consider its relationship with:

  • Fund investment strategy
  • Investor expectations
  • Portfolio characteristics and material impacts
  • Tenant needs
  • Future requirements and trends

How to Integrate an Effective ESG Strategy

If you need a practical sustainability strategy that complements your business whilst keeping you compliant with the regulatory requirements, we can help.

Speak to our team of ESG Consultants today.


Conclusion

There are many and varied reasons why you should be considering ESG as a fundamental part of your business strategy and planning. It’s certainly something that we have been helping a large number of our clients with. When we talk about setting an ESG strategy, it’s no longer met with head-scratching and debates about the value it can bring but is increasingly seen as a fundamental business need in today’s economy. Momentum is building, but the real estate industry still has some catching up to do.

So the question is, why do we still need to be setting out the business case? Shouldn’t ESG be business as usual?

This blog was originally published on GRESB Insights.


[1] DB Academic Insights
[2] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2920788
[3] https://www2.deloitte.com/global/en/pages/about-deloitte/articles/millennialsurvey.html
[4] https://claremontcomms.com/purpose-in-practice/