Focus moves to social impact as ESG becomes standard

ESG no longer needs to be explained and market players are becoming more aware that real estate can benefit cities and communities.

Turning ESG principles into action has become easier because the message has been received loud and clear, experts agreed at an Impact Investing & Implementing ESG Strategies briefing, organised by Real Asset Media.

“We were one of the first movers in issuing green and social bonds, so we have not changed, but things have changed around us. In the last 12 months, we have seen that ESG has become standard in the investment community,” said Assem El Alami, head of international real estate finance at Berlin Hyp. “All our clients know they need to be compliant, but more than that, they now find they can cut costs and be more efficient.”

ESG principles no longer need to be explained to clients and investors because they know what they need to do, and they recognise the benefits of compliance.

“Clearly, regulatory pressure has played a role, because companies just cannot look the other way any more,” said Lisa Hirsch, sustainability asset manager at Schroders Capital. “But the regulation side is more dynamic now, and the focus is definitely shifting from the environment to the social side and to impact investing.”

The challenge is to establish a more structured framework and well-defined KPIs (key performance indicators), so that social impact can be measured. However, concerns about the difficulties in measuring social impact have been superseded by a growing awareness that real estate can make a real difference in cities and in communities.

‘The regulation side is more dynamic now, and the focus is definitely shifting from the environment to the social side and to impact investing.’

Lisa Hirsch, Schroders Capital

“The social aspect is more difficult to value, so we put a framework in place that allowed us to measure the impact,” said El Alami. This meant Berlin Hyp focusing on affordable housing and promoting inclusion, but being careful not to create a conflict with the environmental side by excluding all brown properties that cannot be upgraded to green.

“We have such a big role to play in cities,” added Deborah Fischer, head of sustainability reporting and governance at RSM Belgium. “We can make a contribution to social value and inclusion, we can improve urban design and connectivity, we can enable different types of work, and we can create the mobility of tomorrow with charging stations and cycle lanes. A whole array of topics is included in the S of ESG.”

Don’t forget the G

The acceptance of the importance of environmental factors, and the growing interest in the social aspect, should not come to the detriment of the third letter in ESG: governance.

“We must remember that the governance part is necessary, because only companies with a good corporate culture are in a position to implement ESG,” said Fischer. “The G aspect might be less measurable and less talked about, but it is crucial as it underpins the other two.”

Pressure to do better is coming from all sides: the regulators, other stakeholders, tenants and financial institutions.

“We are an indirect actor in real estate,” said El Alami. “We give an incentive to move in the right direction and the regulators push us to push the clients. Banks in Germany do ESG scoring and a good score, which means better financing conditions, is influenced by all three aspects, including the governance side.”

‘We must remember that the governance part is necessary, because only companies with a good corporate culture are in a position to implement ESG.’

Deborah Fischer, RSM Belgium

The environmental side is the most regulated, the most measurable and the most advanced, but this does not mean that there isn’t much more progress to be made.

“The focus has been on carbon until now, but biodiversity is the next big thing,” said Fischer. “Standards are being developed now and they will be taken into consideration when new projects are being developed.”

Biodiversity is a very local topic, so the issues to deal with can be very different, even within the same country. “You need a multitude of strategies,” added Fischer.

Energy efficiency established

Climate risk is also rising up the ranks as a factor that must be taken into consideration, while energy efficiency is well established as a must-have.

“We look at the long-term sustainability of the investment,” said El Alami. “Certifications are more of an indicator than a proof for us. If an asset is non-compliant, we need a plan on how to make it green, which we are eager to help with, so we and the client go down that route together.”

‘All our clients know they need to be compliant, but more than that, they now find they can cut costs and be more efficient.’

Assem El Alami, Berlin Hyp

‘Together’ is an increasingly important word in the progress towards ESG compliance, as cooperation is crucial. “We can only make a real difference if we all work together towards the same goal,” said Hirsch. “We need to understand tenants’ needs on energy and we need collaboration with them on energy use. Also, property managers are responsible for all ESG-related issues, so it is important that they understand the issues in all its implications.

“This should be in the job description, and we include it in our contracts so that it’s clear what the responsibilities are.”

The property managers are in the building every day, they can see how it is being used, what the problems are, when the lights or the heating are on. They, in turn, must have a strong collaborative relationship with the tenant. Alignment is key.

“A lot of the groundwork has been done in Europe, so now ESG has become commonplace, and we have an integrated approach to the climate crisis,” said Andre Vreman, chairman of the Climate Neutral Real Estate programme. “But all parties have to be involved and be on the same page from the very beginning if we want to get the right outcome in the end.”