ESG in Real Estate: Activism or Capitalism?
By: Catherine Stanton, General Counsel, Head of ESG
Last month, I attended the inaugural ESG & Decarbonizing Real Estate Forum, sponsored by IMN, which drew over 400 registrants from across the residential and commercial real estate sectors. We were all familiar with the alphabet soup of ESG within the real estate industry – GRESB, SASB, UNPRI, TCFD, and the list goes on – and we were all looking to understand how to assimilate it into an understanding of the future of ESG in the industry. Governments and other non-profit organizations around the world have long been grappling with the question of how to address and plan for climate change and social change that we see developing every day all around us. But, as an executive of a profit-driven real estate investment and management firm, my question of the hour was: What does ESG in the real estate industry look like – are we meant to be driven by activism or capitalism? And, how does the answer to that question inform our response?
In short, I came away with the answer: It’s both. Historically, environmental and social impact concerns in real estate have thrived primarily in the niches of mission-based investing, the assumption being that one must sacrifice profits for impact. However, this conference’s consensus is that “impact investing” is taking on new life and new scope. We are headed into a future where environmental and social impacts drive our understanding of real estate valuation as a matter of course. Being able to shape that impact, on both a small and large scale, becomes a value and performance imperative.
For example, climate risk – or the understanding of the likelihood of responses to and consequences of climate change and how societal constraints impact adaptation – is becoming a mainstream discussion as we acknowledge that economic prudence exists in acknowledging that a changing climate has current and future impact on all real estate assets. As the adoption of ESG concerns within the industry increases, we are bound to see wide-scale shifts in investor expectations and the way we view the fundamental future value of real estate and put together healthy portfolios.
Consensus around standards, expectations and requirements regarding ESG in real estate is still evolving. Assuming we eventually all agree on the above, the challenge that we have as an operating partner of investors and owners is a problem of scale. When ESG was a niche concern, we could pull together the human resource to provide a niche response. As ESG becomes “just the way we do things,” the impact-based trickle of concern we once addressed ad hoc becomes an ocean. Our ability to continue to navigate these concerns at scale diminishes without tools, standards, and a deep understanding of ESG strategies. My resulting conviction is that an essential way companies like Cardinal Group can rise to meet the tide is to invest in data, knowledge, and partnership strategies that align with and support evolving investor and industry ESG goals. Like any good sailor, we already know that our progress in the right direction will be data-driven when it comes to ESG. Building infrastructure to collect data, knowledge of how to quality control and analyze it, and an urgent desire to understand it for the benefit of our investors and clients will be essential ingredients in continued success.
I am sure the balance between activism and capitalism in ESG will be an ever-present conversation. With our burgeoning understanding of the effects of climate and social change on real estate value and performance, we have no choice as capitalists but to pursue what may feel to some like activism, to drive the adoption of ESG-conscious approaches to developing and managing real estate, and to make this approach the “new normal” in order to preserve the long-term value and performance of our portfolios. At a minimum, that journey begins with equipping ourselves with the knowledge and the data to chart the course.
The opinions expressed in this publication are those of the author. They do not necessarily reflect the opinions or views of Cardinal Group Companies.