If 2020 has delivered anything, it is clarity. While we were isolated from each other fighting against a common goal, our collective social consciousness was raised, bringing home a pressing reality – that it is now time to pursue profits in a way that considers people and the planet.

Lori Mabardi

Environmental, social and governance frameworks have long existed as tools that help us measure and monitor corporate activity against that very goal. But something changed in the first half of 2020; dollar volumes flowed into ESG mutual funds at double the pace of 2019 levels, according to Morningstar, while website Science Based Targets reports the number of corporations making climate change commitments also doubled over 2019 levels.

On the flip side, between January and May 2020, the National Oceanic and Atmospheric Administration recorded 10 extreme climate events, defined as events that cause at least $1 billion in damage, in the US. The 30-year long run average (1980-2019) is 6.6, annually.

Commercial real estate has never had a bigger obligation, nor opportunity, to re-imagine for a better world. Pressure will only continue to mount as city mayors, regulators, lenders, investors, clients, employees and all stakeholders increasingly demand it. The time for bold ESG‘R’ action has arrived. So, here are five actions to drive that effort.

1 – Take bold action toward a greener future

Robbie Hobbs

The built environment accounts for 39 percent of global emissions, so our industry can play a big role in bringing about a greener future, and it makes financial sense to do so. According to a JLL Central London Research Study, the cost of building sustainable spaces can exceed the regular cost of construction by 10 percent, but that investment can pay off. In fact, BREEAM Outstanding certified buildings garnered rents 14 percent higher than new Class A properties between 2017 and 2019. Additionally, BREEAM Outstanding buildings are almost fully leased at completion compared to non-certified Class A properties, which tend to be 50 percent pre-leased.

These returns are enhanced by the savings recorded through operational efficiencies of green buildings. For example, according to the JLL study, Derwent London, developer of 80 Charlotte Street in London, a building that is under construction and targeting net-zero carbon, will have a carbon footprint 90 percent lower than comparable office buildings. The building is 100 percent pre-leased.

2 – Put health and wellbeing at the heart of a building’s purpose

A standout theme in recent years, due to rising healthcare costs, is an understanding that a healthy workforce is a productive workforce. Research by Harvard’s TH Chan School of Public Health shows that optimizing indoor conditions, like ventilation, lighting and temperature, can improve cognitive function by 26 percent, decrease “sick building” symptoms by 30 percent and improve sleep by 6.4 percent. Today, the definition of ‘healthy building’ has expanded as businesses seek normalcy in a covid-19 world.

FitWel and WELL have responded to covid with the FitWel Virus Response Module and the WELL Health Safety Rating. Dr Andrea Chegut of MIT’s Center for Real Estate says, “Covid-19 has been an adrenaline shot for the adoption of technology solutions that keep people healthy and safe, compressing three to five years of transformation into a matter of months.”

Pre-entry health screening, touchless technology, social distancing sensors and other tools hold the key to bringing people back to the office safely.

3 – Embrace technology as a path toward transformation

Going digital will be a part of any successful ESGR strategy. MetLife Investment Management knows this. In order to support its climate action goal of reducing energy use by 20 percent by 2026, the firm invested in efficiency upgrades at its 910,000 square foot Class A asset, District Center, in Washington, DC. The new smart building technology collects building data and runs it through more than 2,000 analytics rules established to find efficiencies, maximize occupant comfort and predict equipment failures.

“We take our sustainability goals very seriously and understand that digital solutions will unlock the potential to realize real savings,” says Jim Landau, director of Asset Management at MetLife Investment Management. These investments at District Center have lowered energy use by 33 percent over the 2014 baseline.

4 – Underwrite risk and resilience strategies

Executing a resilience plan means protecting your properties from physical risk and protecting your business from transition risk (economic, regulatory, reputational and other systemic risks). Eric Duchon, LaSalle Investment Management’s global head of sustainability, emphasizes the need to bring resilience and sustainability strategy into all underwriting: “When we’re underwriting a potential investment target, we always consider the risks posed to a property, not least of which are climate-related. Whether a property can remain operational amid a climate-related event or is in an area that is less prone to these events are issues we’re looking to better understand.”

In collaboration with its global insurance broker Aon, LaSalle has been reviewing and vetting the capabilities of several climate change analytics and modeling firms to integrate this data into its investment strategy and decisions.

5 – Re-imagine for responsible ownership  

Bringing a responsibility mindset to real estate means taking a whole asset lifecycle view. Every facet of real estate – how we build, manage, operate, staff, lease, finance, supply and protect assets – offers an opportunity to re-imagine responsibly.

Nuveen Real Estate, for example, has taken this strategy to heart. Under the ‘E’ of ESGR, Nuveen is committed to a 30 percent reduction in energy use across its entire portfolio by 2030, and to providing a portfolio-wide pathway to achieve net-zero carbon by 2040.

Under ’S,’ the investment manager invests in many assets with the aim of helping underserved populations, particularly through its impact investing strategy. On the governance front, Nuveen provides transparency to investors around management, strategy and performance of the assets in its strategies, such as the Global Resilient Series. And when it comes to resilience, as long-term investors, Nuveen considers its ESGR efforts critical for not only reflecting its deeply held values and commitment to “doing well by doing good,” but also as a critical part of its fiduciary responsibility to its clients.

 

Lori Mabardi is a senior director, ESGR research and strategy, and Robbie Hobbs is global product group lead, sustainability and workplace management, at JLL