A Focused ESG Strategy Can Drive CRE Resiliency

Already grabbing daily headlines in the United States and globally in most every industry, Environmental, Social and Governance (ESG) is expected to play an increasing role in commercial real estate in 2022, according to a trends report issued Thursday by PwC US and the Urban Land Institute.

The report highlighted several evolving trends shaping the real estate industry, including proprietary data and insights from nearly 1,700 leading real estate industry experts.

Chief among its findings was that flexibility, convenience and ultimately real estate’s resilience, can drive property sector function over the next decade. Consumer expectations of traditionally designed spaces have changed, and there will likely be a massive shift in the functionality of homes, offices, shopping centers and healthcare spaces. 

Urban landscapes are facing change, as new land uses and updated zoning allows markets to evolve. All these factors remain under the cloud of climate urgency, prompting new ways of standardizing and measuring ESG requirements. 

As businesses approach ESG issues in the property sector, it will be imperative to take a holistic approach and create a strong overall strategy—to help create sustainable advantage and value. 

82% of Respondents Consider ESG Elements

The Emerging Trends survey found that 82% of respondents consider ESG elements when making operational or investment decisions. A growing consensus sees the property sector as bearing much of the responsibility for climate change and being uniquely positioned to institute helpful improvements to help mitigate impacts and increase resilience to environmental risks. 

Dave Pogue, Chief Strategy Officer, RiverRock Real Estate Group, tells GlobeSt that the answer for developers is not in the design phase but rather the decision phase of where to invest/develop. He cited an annual report issued by the international real estate company, Grosvenor Group, ranking the world’s 50 “most important” cities on a series of environmental and social factors, creating a comprehensive risk management tool for their potential long-term investment targets.

“As the Grosvenor Group demonstrated, location is becoming a critical consideration,” Pogue said. “For new or even existing developments in ‘at risk’ areas, there are a number of steps owners/developers can take.

“Many of these were learned after Hurricane Sandy and include placement of critical equipment, and creation of redundancy and backup to both critical equipment and communications protocol.”

Despite industry participation in environmental accreditation programs and broader ESG initiatives, investors have been slow to incorporate environmental risks into underwriting, according to the PwC-ULI report. However, the growing risks of climate-related property damage may induce more investors to follow the example of leading institutional investors in factoring market-level climate risk into decision-making. 

“While the initial and primary focus of Grosvenor Group was concern for issues related to climate change,” Pogue said, “what was perhaps most innovative for the time was the inclusion of a broader range of social and governance factors as well, such as infrastructure, education, and business climate. Today many more investors, especially ones with global portfolios and longer-term investment horizons are actively doing similar evaluations. Some sophisticated investors have created internal resources to address this issue, and all are now aided by a number of governmental and privately-curated databases with both historical averages and predictive modeling.”

Pogue said the past few years “have completely rewritten the standards relating to climate/weather events. The issue of resiliency is becoming one of the most important factors for investors to consider.”

Pogue said the issues of most concern for investors today are those same issues or events that concern the insurance industry. 

“Insurability is not just important, it is imperative,” Pogue said. “Commercial insurance rates are already rising in many areas such as New Orleans, Miami, and Houston as the near-term history of weather-related casualties keeps worsening. 

“What were 100-and 10-year storm events are occurring much more frequently. Now you can add ice storms in Texas as well as fires and droughts in California to the list of regularly occurring casualties.”

The State of California, for example, has been forced to offer “last resort” insurance for many wineries battered by several years of drought and wildfires that have made many of these properties uninsurable.

MDH Partners Updates ESG Policy: ‘Part of Its DNA’

MDH Partners, an Atlanta-based industrial real estate investment company, updated its ESG policy this week. Its CEO, Jeff Small, tells GlobeSt that he believes his firm’s role as a real estate investment company “goes far beyond those of a financial nature. Investors and their investments also have societal impacts, and we have embraced this view, since ESG principles lie at the very heart of the mission and DNA of our firm.”

Small said the past year has sparked renewed and difficult conversations about sustainability, racial inequality, and the health and safety risks associated with the built environment, further illustrating the real estate community’s obligation to create a more sustainable and equitable future.

“We’re witnessing a paradigm shift and ESG is among the first topics investors ask about these days,” Small said. “We value diversity not as a “check-the-box factor” of what our investors expect of us, but because diversity makes us a stronger organization. 

“Having a team in which all members have similar backgrounds and life experiences naturally leads to one kind of thinking. Creativity, however, arises from new perspectives, new ways of viewing our world to brainstorming innovative aspects of an urban industrial redevelopment, all led by new members of our more diverse team.”

Positive Environment, But Challenges Ahead

Byron Carlock, PwC Partner and U.S. real estate practice leader, said in prepared remarks that an abundance of investable capital, low interest rates and a continued demand for many product types has created a positive environment for the industry.

“However, not everything is rosy, and real estate still has its challenges ahead,” Carlock said. “There are rising costs, pending tax reform, and new infrastructure spending that could impact the labor market. There are also various social issues, in which the industry can take a leading role in helping to solve. Some of those include affordable housing, ESG-focused city planning, and neighborhood inclusiveness. 

“It’s important that regulators, policy makers and business leaders work together to establish trusted standards that guide responsible behavior in our new post-pandemic reality.”