In One Year ESG Has Gone From 'Need to Have' to Table Stakes

The social component of ESG strategies has become important “for all the right reasons” as of late, according to CBRE CEO Chuck Leitner.

The global CRE firm’s chief executive noted on a recent episode of the firm’s “The Weekly Take” podcast that while governance has been a key component for quite some time within the CRE industry, the social component has assumed a particular importance—rightly so—over the last few years. 

Communication around ESG goals requires a lot of nuance, according to Leitner. This starts with making quantifiable commitments to an objective and expressing concrete steps to getting there, “which makes a big statement and your willingness to measure progress against those goals,” he said. “It takes a lot of bravery to put a number out there and also be able to say explain why you’re not there or why you may never get there to an absolute net zero situation.”

“We need to put numbers on the table,” he said. “We need to manage ourselves to those numbers, and we need to learn how to explain how we’re progressing against those goals.” Otherwise, “you’re just not going to be in the conversation if you don’t do that.”

ESG has “probably changed as much in the last 12 months as it did in the last 12 years,” Sonny Kalsi, CEO of BentallGreenOak, said on the podcast. “ESG has gone from being interesting, to nice to have, to need to have to now, in my mind, absolutely table stakes.”

Invesco Real Estate CEO Scott Dennis echoed that sentiment, noting that his firm started tracking energy consumption on office and multifamily properties about 13 years ago, at a time that “green was really about the bottom line…we understood the energy efficiency had a direct bearing on the bottom line, but it was a very different narrative and it has evolved.” Now, ESG is not only top of mind for investors but “if you’re going to lease buildings, these are some significant things that sophisticated global tenants want for space…you’re just not going to be in the running for top notch tenants if you’re not very focused on ESG.”

Europe is much more focused on ESG efforts than the US, Dennis said, noting that the SFDR leaves “literally no negotiating room” in terms of accountability standards. “It is now a constant in the equation,” he said. “[At] Invesco Real Estate, we came out earlier this year and we absolutely stayed. This is on a global basis. But, you know, we stated targets, three percent annual reduction in energy and emissions by 2030, net zero carbon emissions by 2050, one percent reduction in water consumption and then one percent annual increase in waste diversion rate. So it’s not just talking about it, it’s getting specific and also putting timelines with those aspirations.”

European and Asian investors have been “much more all over this” than their North American counterparts, according to Kalsi.  And those investors want to see demonstrable, measurable improvement, “and they are going to reward those managers who show that,” he said.

“The US investors are going to catch up quickly on this,” Kalsi said. “My view on this is you can have a long discussion about what the right thing to do is. You can have a long discussion about how much it impacts the top and bottom line. What’s most important is the investors want it and expect it. And so we’ve got to deliver on it. And that’s why I say it’s table stakes.”

Accountability is key, the experts agreed: in five years, “I think we’re going to be a lot smarter than we are today,” Dennis said. “But, you know, real estate houses the economy. It houses society. So these are societal issues. These are economic issues. They’re environmental issues, as we’ve talked about. They can’t be disconnected… and if you have transparency, there is no place to hide.”

And while the pandemic has fundamentally altered how companies (and the people within it) do business, Kalsi predicts the next five years will bring more environmental and social change than the last 12. Firms must commit, he said, to measurable benchmarks and change-focused initiatives, and they should hold one another accountable.

 “It’s going to be sustained, permanent change,” he said. “I will tell you every time I get a little bit bummed out, I just look at the younger generation, whether it’s my kids or the young people that work for us in the company, they’re holding us to task…I’m very optimistic.”