Leaders lead. Real estate managers know that to set the right tone, leadership needs to take a stance on ESG and to be proactive, rather than merely reactive. “Leadership is critical,” stresses Peter Holden, managing director, co-head private real estate asset management at Partners Group. “Unless you have alignment around what your goals are and what you are trying to achieve, a lot of effort can be wasted without accomplishing anything meaningful.”
And while leadership is ultimately responsible for integrating ESG into the makeup of real estate businesses, what role should the board play in the ESG committee? And is there even a need for a bespoke ESG committee at all?
“Integrating ESG into the overall strategy and in the complete value chain has to be the board’s highest priority,” says Gijs Plantinga, North American investments director at Dutch-based real estate manager Bouwinvest. “Our new CEO has made this his personal mission and we are firmly convinced that long-term financial returns and the fulfillment of our fiduciary role depends on making the right ESG choices.”
At Partners Group, the board of directors is accountable for the manager’s sustainability strategy and oversight of ESG at the firm and portfolio level. Implementation of the sustainability strategy is delegated to the executive team under the lead of the CEO and advised by the chairman of sustainability. Investment teams are also guided and controlled by the sustainability team to guarantee ESG integration across the portfolio.
“We have a dedicated ESG investment leader who works with our asset managers and operating partners to co-ordinate and implement our global strategy,” explains Holden. “It is a very senior role with links to our infrastructure and private equity businesses, reflecting the importance we place on ESG within real estate.”
A mix of board-level participation and appointed ESG experts is something many real estate managers cite as invaluable. A PwC survey from 2021, gauging the views of 851 directors across a multitude of industries including real estate in the US, found that while 64 percent of directors believe their strategy is now tied to ESG issues, only 25 percent of directors had a strong grasp of ESG risk. Another study of board level competence in the US found that out of 1,188 Fortune 100 firms, just 29 percent of directors had relevant ESG credentials, mostly on the social side clustered around health and diversity issues.
Blending ESG expertise with board oversight is critical for offsetting this potential lack of experience and fully integrating sustainability into company strategy. When asked what aspects of board knowledge need the most improvement, a March 2022 EY survey revealed that more than 70 percent of corporate board members believe more external, independent perspectives from advisers and experts would add value. ESG experts are explicitly there to solve this problem, helping assess and report risks and opportunities that otherwise might be neglected.
German-based manager Patrizia has a dedicated ESG committee that reports directly to the management board and draws from its 13 members a mix of the C-suite, team leaders and ESG experts. Global real estate manager BentallGreenOak also has a 12-person sustainability team reporting directly to its co-CEO.
“There needs to be a top-down approach where your board and management has ultimate oversight [of ESG]”
“The ESG team’s connection to the C-suite is further enhanced by clear lines of partnership with all our global investment management and asset management teams, where the firm’s ESG missions become actionable strategies that are measured across our portfolio of properties,” says Anna Murray, managing director and global head of ESG at BentallGreenOak. “These strategies help target risk mitigation, value creation, industry stewardship and tenant/stakeholder engagement.”
Real estate manager GLP splits its sustainability teams into a global ESG committee led by the global head of sustainability and made up of senior members from every region and multiple functional disciplines, including the C-suite. Below that, the manager has regional ESG committees responsible for local ESG initiatives and collecting ESG data, all collaborating with the global ESG committee above.
“I have seen different versions of who is responsible for ESG, but ultimately there needs to be a top-down approach where your board and management has ultimate oversight,” says Meredith Balenske, senior vice-president, global head of sustainability and ESG at GLP. “We found that having an ESG governance structure that matched our regular governance was critical for success.”
Beyond just deciding where ESG decision-making should sit at the leadership level, the background and makeup of board members and ESG heads is also a crucial element that firms are starting to recognize.
A 2022 PwC survey observed that female directors were 10 percent more likely to see the value in an ESG strategy and prioritize climate change than male directors were. The same survey also revealed that more than nine out of 10 directors believe that diversity brings unique perspectives to the boardroom.
“Having a good diversity agenda is the best way that we can avoid groupthink and bias creeping in,” stresses Holden. “A diverse group of decision makers ensures that ESG is really being considered throughout the entire decision-making process.”
Cope Willis, managing director of sustainability at US-based real estate manager Greystar Real Estate Partner, adds that “what we found is that you really do get better outcomes when you have a more diverse group of leadership, discussing and debating various business issues.”
Partners Group is one manager that has stepped up its commitment to DE&I. Last year, the firm strengthened its DE&I committee to five members, including two from senior management. It also expects to more than double its female partners and managing directors by 2025.
“Diversity is pretty key for us, and there is a big push to support female talent,” says Rahul Ghai, managing director, co-head private real estate Europe, at Partners Group. “Equally, there is a drive for employees to reflect the local talent pools in the societies in which we operate, which may mean different things in different geographies.”
Balenske echoes this, adding: “You need to make sure that diversity goes beyond just gender to include culture, race and socioeconomic background to ensure you are getting different perspectives from lead decision makers.”
These different perspectives are clearly important and can strengthen decision making by leadership teams. As always, these weighty decisions start at the top.