ESG As An Investment Strategy

Investors are increasingly looking at environmental, social and governance (ESG) as part of their analysis to identify risk and growth opportunities.

While ESG metrics are not usually part of financial reporting, more companies are making disclosures in their annual reports or in standalone sustainability reports.

A recent survey conducted by RCLCO Real Estate Consulting found that the real estate community may underappreciate ESG’s intended benefits — risk mitigation and value enhancement — and where adoption is prevalent, investors are leading the way.

According to the RCLCO survey, 38% of investment firms have an established ESG policy, but it varies across organizations based on their capital structure. Public and private companies investing on behalf of institutional investors were more likely to have an ESG policy in place than managers who rely on high-net-worth individuals.

“A main driver of the move to embrace ESG in pensions is the inherent need for long-term managers of corporate risk and opportunities to live up to their responsibilities as intergenerational stewards of capital,” according to academic research from the University of Pennsylvania.

According to Nareit, the real estate investment trust (REIT) industry association, investors asked the most questions about ESG in 2021, with the top two topics being greenhouse gas emissions and climate change opportunities and risks.

But according to the RCLCO survey, companies did not cite “investor demand” as the primary reason for putting an ESG policy in place, although it did come in fourth as the most popular reason.

The top two reasons cited for driving ESG exploration or adoption were “alignment with company values” and a desire for “positive community impact.” Survey respondents ranked “maximize value” and “risk mitigation” toward the bottom of the list of factors leading companies to adopt ESG policies or practices.

Of the companies surveyed, 61% do not have an ESG policy in place and of those, only 18% have plans to create one. Among the reasons cited for not adopting ESG policies or practices are “lack of internal resources” and “management support.”

Tips To Get Started

RCLCO offers a few suggestions for real estate investors and operators to make meaningful progress in incorporating ESG into their plans.

• Start with the simple: Focus your attention on what parts of ESG matter most to your company’s core competencies. If you take a measured approach, adopting an ESG program shouldn’t deplete your resources.
• Emphasize the economics: Research has developed a strong economic case for incorporating environmental and other factors into investment strategies.
• Don’t get distracted: Don’t let time-consuming reporting and benchmarking get in the way of making progress. Investors want to see and understand long-term risks and opportunities, many of which are addressed within an ESG framework.
• Integration is key: Integrate specific concepts into your business and investment decisions.

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