Rethinking ESG: turning the definition on its head
In a webinar organised by Drooms, four experts debated the question of what exactly sustainability entails.
The real estate industry, however belatedly, is finally taking ESG seriously and is learning to deal with its different aspects. But should the three letters – indicating environmental, social and governance – be in a different order? This and other questions were discussed by four sustainability experts during a webinar titled “Rethinking ESG: what works? what to avoid?”, organised by Drooms, the European secure data room provider.
Turning ESG on its head could help identify what the priorities are for each company at this particular point in time. “I think the G of governance should be the first letter, because that’s where the push to do something comes from,” suggested Pia Maria Goossens, director of business development at Drooms. “If there is regulation, environmental measurements are undertaken and then stakeholder benefits follow.”
‘S should be the last letter’
The environmental part is the biggest, the most advanced and the most measurable, while the social part is tricky to measure, she added. “So the S for me would be the last letter, not because it’s less important, but because there are many different interpretations of it and there is still a long way to go. In my view, the initials should be GES.”
However, Brigit Gerritse, head of research and strategy at Redevco, had a different view. “The S needs more attention, and working on the social aspect can be so inspiring because you really feel that you can make a difference,” she said. “When a building or a location doesn’t have social value, it will not have a future, so it cannot have an economic value.”
So, given the importance of the environmental side, should the initials be SEG? Gerritse suggested that maybe more issues should be included in what constitutes ESG. “We need to think about biodiversity and climate change and waste management, especially in an urban context, so I think we need to be prepared for things to become more complicated, not less.”
Opportunity not obligation
Johanna Fuchs-Boenisch, chief executive of Susteco, said another letter should come before ESG. “I would start with the letter O, which for me stands for opportunity. I know a lot of people would perceive the O as obligation, but I think companies have a really good chance to look at their portfolios from an asset management point of view and not only maintain, but increase, their value. Then it doesn’t matter which order [the letters of] ESG are in, because they go hand in hand and the one cannot work without the others.”
Fuchs-Boenisch’s point is that following the rules and complying with the EU Taxonomy is not about being a “goody two-shoes” or a tree hugger – it is pure self-interest and makes commercial sense. It’s about protecting an asset’s value over the long term.
“The big players, and also in my opinion the smart players, are well ahead of the game and have looked into ESG and have actually seen the opportunities,” she said. “There’s a perception in the market that there are only obligations to come with ESG, rather than looking at the potential savings.”
One clear message emerged from the discussion: it is wrong to wait until all your ducks are in a row. When it comes to sustainability, it is essential to get started, even if the road ahead is not clear or perfectly planned.
‘There are always innovators and laggards, but the wait-and-see approach that is dominant in the real estate industry is holding us back. We can do much better.’
Brigit Gerritse, Redevco
“Don’t wait until you think it’s all perfect, and if you have the feeling that you can’t do it alone then look for like-minded partners,” said Gerritse. “If you try to be a force for good then you can never take a wrong decision and you will never regret your actions.”
When it comes to ESG, perfect should not be the enemy of good, as the saying goes. Embarking on the right path is what matters, and the road ahead will become clearer once the first obstacles have been overcome.
“Getting on with something and picking the low-hanging fruit is tremendously important,” said Fuchs-Boenisch. “People shouldn’t be stopped from starting things by a perception of hurdles that are not necessarily there. Very often, with very small measures, you can achieve a lot.”
The general consensus was to start immediately, even with small steps, for example by setting clear goals, collecting necessary data, implementing green lease contracts, and looking at energy efficiency.
It is important not to “overthink”, added Goossens. “It is true that there’s plenty of low-hanging fruit and a lot of small things that can be done before you reach the point of having to make big investments. So stop overthinking and start doing.”
Mindset is the biggest hurdle
Another misconception in the industry is that being ESG-compliant is not only complex, but also extremely expensive.
“Some people think you need a separate budget for ESG and it will cost millions and billions, and that is definitely not the case. In most cases it’s just misinformation,” said Lutz Kandzia, head of the ESG unit at HanseMerkur Grundvermögen. “The real hurdle is the mindset, because change is difficult. The reality is that if you think what a building needs, it will cost you less to do earlier rather than later.”
Mindset is crucial, agreed Gerritse. “There are always innovators and laggards, but the wait-and-see approach that is dominant in the real estate industry is holding us back. We can and should do much better.”
The way forward is for companies to integrate ESG considerations into every aspect of their business and every asset in their portfolio, making them an integral part of decision-making at every stage.
‘Sustainability consultants and experts will not be pigeonholed, but will be embedded across all lines of business within an organisation.’
Pia Maria Goossens, Drooms
“Looking ahead, the long-term trend I see is that ESG will not be confined to a separate department, the whole company will be involved,” said Goossens. “Sustainability consultants and experts will not be pigeonholed, but will be embedded across all lines of business within an organisation.”
There has been a lot of progress on the innovation front and there are many examples of interventions that work, the panel agreed.
“There are already so many fantastic solutions providers in the market who can help asset managers and investors improve their buildings,” said Fuchs-Boenisch. “I very much hope that the whole industry becomes a little bit more interested in innovation and what they can do – and digitalisation obviously goes hand-in-hand with this.”
There is momentum behind ESG now, but the danger is that with the current difficult economic environment, following high interest rates and a fall in transactions, it will cease to be a priority for companies.
“The positive thing about ESG is there’s a lot of activity and also creativity in new sectors, from construction to regulation, documentation, software and everything else on a scale we have never seen before and this is why I’m very positive,” said Kandzia. “However, the situation is very volatile, especially now with the lack of investment activity, and the risk is that ESG takes a back seat.”
