The ABCs of ESG

Sara Neff

There are many ways for real estate companies to measure environmental, social and governance (ESG) performance. In fact, maybe too many. For those who want to remain relevant as investor interest in ESG grows, where to start?

According to data collected by Deloitte, half of all professionally managed global assets are projected to have a strong ESG component by 2024. While the markets went into a nosedive at the onset of the pandemic, ESG funds outperformed traditional indices in the U.S. and in Europe during 2020. With forecasts of a recession on the horizon, investors are likelier to gravitate to assets that will grow in value even during a bear market.

For asset managers just now coming around to ESG, there are numerous ESG third-party disclosure frameworks available to measure and disclose performance, such as GRESB, CDP and the Dow Jones Sustainability Index. Other platforms including MSCI, ISS and Sustainalytics primarily serve to inform investors of various assets’ ESG ratings. These are all competing products, and each has a customer base willing to pay for its research, tracking tools and/or consultation. On top of that, there are multiple frameworks for reporting ESG data in corporate financial or ESG reports, such as SASB and GRI.

While competition leads to innovation, it can also create confusion in the marketplace. The dizzying array of options can make it difficult for companies to choose a meaningful ESG measurement program. It also complicates matters for ESG-minded investors trying to manage their portfolios. Fortunately, a global movement to consolidate these platforms has begun to gain momentum.

Tracking, Disclosing Metrics

Navigating the disclosure space is becoming increasingly important as more companies declare ESG intentions and now must demonstrate tangible progress. Even more critically, having an accurate understanding of underlying sustainability data is crucial for implementing successful ESG programs. For example, if a company is looking to procure renewable power, they must know the current electricity consumption of their portfolio.

ESG disclosure will only become more important as investors’ understanding of the ESG performance of portfolio companies matures, raising the bar for what qualifies as a truly ESG-centric asset. My company, Lendlease, has made a commitment to achieve net zero for Scope 1 and Scope 2 emissions by 2025 and absolute zero across Scopes 1, 2, and 3 by 2040.

Our absolute zero target means eliminating all greenhouse gas emissions without the use of carbon offsets. Right now, to address our Scope 3 emissions, we are focused on reducing embodied carbon in our development and construction projects. We do this through working with our supply chain partners to procure lower carbon construction materials like concrete and steel—for example with projects such as Claremont Hall in New York and The Reed at Southbank in Chicago. Reducing carbon in other materials like gypsum and glass is more difficult and makes the journey to absolute zero more challenging.

However, embodied carbon is only part of our Scope 3 emissions, and the real estate industry has a lot of work to do to meaningfully understand, measure and tackle all of Scope 3. Current disclosure frameworks do not focus on Scope 3 emissions, making it even harder for real estate companies to start making tangible progress in this space.

ESG isn’t just about environmental impacts, of course. Just as important—but perhaps harder to track—are the social outcomes created by the development and operation of an asset.

Historically, the CRE industry has fared poorly on ESG in comparison to other sectors, largely because of its lack of transparent disclosure on social issues. This is because the CRE industry has faced little pressure from consumers to disclose on social metrics. By contrast, retail brands that sell items that consumers wear or eat have faced more advocacy to, for example, disclose work conditions for employees. Therefore, CRE has a large opportunity to measure and improve social outcomes, which will in turn elevate the perception of ESG in CRE as a sector.

Meeting the growing demand for ESG investments means that asset managers must not only become conversant in how to track and disclose various metrics, but also remain educated as the movement evolves. Those that invest the time and resources in this critical area today are best positioned to remain destinations for capital in the future while bringing about profound and meaningful environmental and social change.

Sara Neff is the head of Sustainability for Lendlease.