There is a belief that ESG costs money but in fact, the opposite can be true, says Stefan de Goeij, Head of Property Management at Avison Young in the Czech Republic. He talked to Property Forum about compliance, commitment and tackling all the components of ESG in the real estate industry.
What does ESG mean for you as a consultant and for the property sector in general?
As a consultant, this begins with aligning my personal and our corporate values and beliefs with the professional advice we provide to our clients. ESG in recent years has gone beyond a tick boxing exercise and both investors and occupiers want to see meaningful progress and changes in this ever-evolving landscape. ESG boils down to doing the right thing and this can be looked at from different lenses. For example, private equity seeking investment from pension funds now has to come to terms with the expectation and requirements that certain aspects of ESG will be part of the mandate. The property sector, in general, perceives ESG in very different ways. There are those who seek compliance and then there are those who are committed. Imagine a line is being drawn between two points ‘compliance and commitment’ here you have the laggards at the point of compliance and the leaders sitting at commitment. You will also have those in-between doing a bit more than the minimum whilst contemplating when the right time is to edge towards the leaders.
With ESG, the focus is usually on the E, especially in real estate. Why do you think that is? Could you highlight some best practices for tackling the S and G components of ESG?
Environmental metrics have traditionally been the most tangible of all. Energy efficiency measures, solar panels on the roof, water reduction initiatives, waste management generate very tangible outputs. With the increase in utility prices across Europe energy is now at the forefront of both landlords and occupiers.
Best practices in my experience for tackling Social would be:
Best practices in my experience for tackling Governance would be:
In general, is the successful implementation of an ESG strategy based on a strong digital component?
Partly. Environmental metrics, yes – because you can measure an assets’ energy, water, waste performance and proceed to report the carbon emissions and the carbon footprint of the portfolio. Reporting the emissions is the starting point and this level of transparency requires data gathering and monitoring. Having a digital strategy helps with this aspect.
For the S and G, it is a case of monitoring and actioning components. For example, a KPI for ‘Governance’ is measuring tenant satisfaction, which is a good indicator of how well the asset is managed. The survey link can be emailed to all to get feedback but then what is done with the results and responses gathered. The S and G are more of the human component and more to do with engagement and hence technology plays a limited role.
The underlying successful implementation is all about transparency - reporting to investors and stakeholders. Because in theory if you must report then the question is what are you reporting? So, to report something, you have to actually implement initiatives, and this leads to the change.
ESG compliance is often difficult to measure. Existing certification systems such as BREEAM or LEED mostly focus on the E component. Do you expect ESG certifications to appear and go mainstream?
I don’t agree with this statement fully. ESG in the sense of compliance is about local laws and regulations which are defined and one has to follow in each market / jurisdiction. The lawyers, enforcement authorities are the vanguards who ensure that the asset is compliant with the law of the land at every stage of the property life cycle.
Certification schemes such as BREEAM, LEED are a voluntary component and something which is now being expected across major trophy / prime assets / new development. You have to appreciate that BREEAM and LEED have been around for a long time and when they started it was all to do with E. The real challenge is that S and G components tend to be more subjective than objective. Worth mentioning is that BREEAM and LEED certifications are given out once the certifying process is over, ESG is about measuring continuing performance, KPI’s, indicators and report on that, so this goes beyond the above-mentioned certifications.
ESG certifications will go mainstream when the markets / occupiers expect the highest standard of every space they occupy or rent. This is in motion as we speak. If you research the major trophy assets being constructed across the mature markets of London, Paris, Amsterdam you will see that the people behind these flagship projects have left no stone unturned when it comes to environmental certifications.
Landlords are often reluctant to invest in something with a long-term return that’s often difficult to quantify. What are some of the “quick fixes” they can implement in their existing properties?
My advice would be to start with understanding landlords’ overall strategy for the asset and how long are they willing to hold before they exit. To future proof an asset you have to implement measures today that will make it attractive in the year you are planning to exit. A simple example to put this in context would be electric car charging… looking back five years how much demand was there for electric cars. Back then it was a luxury and hence you didn’t see EV charging stations everywhere. Where are we now and where are we heading…. EV demand is going to explode and governments across the EU want to push EVs into the mainstream while reducing dependence on traditional fossil fuels. Our research tells us that the next big thing in the property space would be getting properties to Net Zero Carbon. Here we see that the traditional way of investors is changing as well, they are thinking long term and keep their eye on the future.
Quick fixes: – what we advise and deliver, is to begin with reviewing energy, water and waste across your site(s), basically, they are the E components. Conduct a formal energy audit and technical assessment to ascertain what changes can be implemented within the acceptable payback times. Proceed to S – what is being done at the site to help local communities and what more can be done given the space you have. Engaging with the tenants and communities to understand their expectations and aspirations will be a good starting point. Finally, the G – those responsible for running the asset should set clear objectives and targets which acts as a roadmap for all involved.
How can landlords balance costs related to achieving ESG goals with the long-term benefits of such investments?
The balance lies in landlords aligning their investments with their own ESG policies, KPIs, targets and objectives. There will always be the age-old conflict of landlords installing energy-efficient equipment and the tenant making the most in terms of benefits derived by reduced consumption and costs. Tenant engagement would be another avenue where the landlord can realise the benefits of ESG investments.
For example, in the case of an industrial asset, the landlord goes ahead and installs solar panels on the roof. Then enters into a power purchase agreement arrangement to supply the tenant with green electricity generated from the panels. The benefits are twofold; the tenant procures clean green electricity and the landlord is able to negotiate the lease for a longer-term.
There is a belief that ESG costs money but in fact, the opposite can be true. When we consult on ESG, this is always a factor we explore and advise on.
Some tenants/investors are already only willing to lease/acquire ESG compliant assets. Do you expect this trend to intensify in the coming years?
Yes, as ESG gets on top of board and management agenda’s we will only see this gain further traction and intensify. The larger occupiers already have targets and policies in place which emphasise that they will only occupy assets that meets their prescribed ESG requirements. On the other side of the coin are the institutions acquiring assets with all the certifications and ESG credentials in place. This in turn has a trickledown effect in the market where the medium-sized tenants and investors get in line and follow suit. The real litmus test of this trend is the pace at which these assets are snapped up by occupiers and investors. There is growing evidence that assets with strong ESG credentials attract tenants with the best covenants and are generally found more attractive. From a practical point of view, this will become the new normal.
What will be the role of consultants in making the real estate sector more ESG compliant?
For me, this is the journey from compliance to commitment. We are in a unique position to help those who are beginning their journey and are apprehensive about what this means for them and how they can stay on top of trends whilst remaining profitable and relevant.
At the same time those players who are mature in terms of their ESG approach, we are here as a critical friends to advise, manage and oversee the implementation. A beautifully worded ESG policy on paper is very different to an actual physical asset and we can help guide at every step to make their objectives and policies come alive when the physical asset is ready and run day today.
ESG compliance is a very different thing altogether. It is about following the law of the country and ensuring when the asset is being let, acquired or managed the regulatory and compliance checks are being met and carried out. There is never a real question of being more or less compliant…it is all about your intention of either just meeting the bare minimum or going above and beyond.
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