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  • Jacob Bourne

No Longer an ‘Emerging Trend,’ ESG Investing Soars During Pandemic

ESG, or the environmental, social and corporate governance set of values, has been around for two decades, having been initially launched by the United Nations as a means of promoting and measuring corporate social and environmental responsibility. However, with the impacts of climate change escalating, ESG has been thrust into the spotlight, with considerable pressure on companies to chart more sustainable courses.

solar panels on factory
Solar panels on factory roof. Credit: Shutterstock

“Environmental, social and governance criteria are an increasingly popular way for investors to evaluate companies in which they might want to invest,” said Breana Wheeler, director of operations for BREEAM USA, who moderated an Exemplifying Leadership through ESG event in October. “The appetite for ESG investing continues to soar with record inflows amid the COVID-19 pandemic, and real estate firms are now issuing more opportunities for investors to direct their capital towards sustainable projects.”

With nearly 40% of global greenhouse gas emissions related to buildings, elevating the importance of ESG has become crucial for the real estate industry and investors are paying attention.

Matt Praske, WashREIT, director of energy & sustainability, said that his firm has focused on ESG from “bottom-up” pressures such as tenant demand over the last ten years. Now the pressure to push ESG initiatives is coming from investors who want to see impact metrics on sustainability changes made to properties. Additionally, there’s regulatory pressure from local and federal governments for meeting ESG requirements.

“We’re feeling the sense of urgency around ESG topics and climate change,” said Deborah Teng, PGIM’s ESG manager. “In August, the IPCC Working Group released their sixth assessment report showing that we’ll probably exceed 1.5 degrees Celsius of warming within the next few decades, and that's supposed to be the limit for what's necessary to prevent the worst climate impacts. If we all dramatically and permanently cut our emissions immediately, it would only start getting cooler around the middle of the century, so there is that risk appetite that has taken on a sense of urgency.”

Effectively implementing the ‘E’ values in ESG isn’t without considerable challenges, especially regarding the built environment. For instance, Teng warned against real estate companies getting pigeonholed into wholly adopting a particular technology that could quickly become obsolete, driving assets into a dead end.

In general, change is never easy, and the shift from relying on natural gas for heating and cooking to the full electrification of buildings requires significant investments and major upgrades to grid infrastructure. Furthermore, conventional cement and steel — the bedrock of construction — come with a high carbon footprint, and alternative materials are still in development phases.

“We need massive technology innovations to solve the riddle of how to construct buildings in the future,” said Brooks Gordon, managing director at W.P. Carey.” “Cement and steel — for those two industries, we don't have a fix yet. And so, until that is solved, we’ve got a real problem.”

However, one area Gordon said represents an opportunity for significant progress is solar. Buildings are generally wide and possess large roofs well-suited for solar arrays to bolster electrification and decarbonization. Solar technology has also been advancing for years, making it easier to implement. “It’s a huge latent asset that our country and others have sitting fallow,” said Gordon. He also emphasized the need to build new efficient buildings and make a broad range of existing assets more sustainable.

While the more significant push for promoting ESG values is well-warranted, a potential pitfall is greenwashing, which Wheeler described as a company giving the appearance of decarbonizing to promote its brand and attract capital without actually making meaningful changes.

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For instance, a study recently found that some big tech companies like Google and IBM have underreported their greenhouse gas emissions.

The need for disclosure is not only about reporting positive changes and responding to external pressure but also acknowledging challenges, Teng said, as a way to avoid greenwashing, adding that communicating hurdles to progress can drive innovative solutions. Gordon cautioned about setting lofty ESG goals while being lured by the publicity and capital market excitement that could accompany them, without considering the long-term practical implications of actually implementing the measures.

“We need to always be careful not to overpromise,” said Gordon. “If we’re dealing in facts and being transparent about them, I think greenwashing is something we’ll be able to avoid proactively.”


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