The challenge of prioritizing ESG against short-term crises

It was the short-term crisis known as the coronavirus pandemic that first put ESG issues front and center of many real estate organizations’ agendas.

“Just reflecting on the last three years, what I think happened during covid is ESG became very, very relevant in all the discussions,” recalled John Pattar, head of real estate Asia at KKR, during the opening keynote panel at the 2023 PERE Asia Summit this week. “We were at home, we were looking at the impacts of the pandemic. And first on everybody’s minds was, is this the world we want to live in?”

Many ESG rules and regulations were implemented during the pandemic, he noted. For example, the EU’s Taxonomy Regulation and the main provisions of the EU’s Sustainable Financial Disclosure Regulation came into effect in July 2020 and March 2021, respectively. The EU taxonomy established the creation of a common classification system for sustainable economic activities in the trading bloc, while SFDR is intended to improve transparency and prevent greenwashing in the market for sustainable investment products.

But a year ago came Russia’s invasion of Ukraine, which Pattar called “the first geopolitical tension that’s affected everybody.” Now, instead of focusing on long-term objectives such as ESG, “people are actually dealing with problems right in front of them,” he noted. “So you can’t tell certain parts of Europe that they’ve got to focus on ESG when they’re just worried about living.”

Pattar pointed to the Urban Land Institute and PwC’s recent Emerging Trends in Real Estate Asia Pacific 2023 report. Among a list of the most problematic issues for real estate investors, climate change ranked last, with impending interest rate hikes and geopolitical tensions taking top priority. CBRE’s regional investor intentions surveys reflected a similar deprioritizing of ESG issues, as PERE reported last month.

However, Pattar stressed ESG should remain a long-term business objective for every organization, regardless of what is happening in the world. “Short term, it might drop down the list of importance, because you’re dealing with day-to-day, quarterly problems,” he said. “You can’t take away the fact that every quarter, there’s going to be a new crisis, which will just move to the top of your list to deal with. But I don’t think it changes the long-term ESG objectives.”

Sabine Schaffer, co-founder and CEO Europe of Sydney-based manager Pro-invest Group, agreed that short-term challenges arose from covid-19 and interest rate increases over the last two years. But with new crises expected to continue to emerge, the rules and regulations that became effective during the pandemic will play a critical role in ensuring real estate groups stay on track to meet long-term ESG objectives. She said “it is absolutely paramount” that the regulatory landscape “impacts company policies to make sure you’re not losing sight of the ESG requirements.”

Schaffer pointed to a hotel in Europe where she recently attended a conference, and how one German institutional investor had been close to buying the property four years ago. However, because of the EU taxonomy now in place, it would be impossible today for the investor to propose buying the asset to his investment committee.

“In about five years’ time, yes, hopefully we’ll have left covid behind, and we’ll have lived through the rise in interest rates, but the big elephant in the room is going to be ESG,” she said. “I no longer believe it’s about how much ESG is going to cost me [if I put it in place], but how much it’s going to cost [if] I don’t put ESG in place.”