What the Acronym ESG Actually Means for Commercial Real Estate

The acronym “ESG” is becoming an increasingly common catch-phrase in the world of commercial real estate, investing, and beyond. Defining exactly what the term entails can be a tall order, though, and Coldwell Banker Commercial has provided a helpful introduction in a recent blog posting. We’ve excerpted it here. 

“ESG stands for Environmental Social and Governance, and refers to the three key factors when measuring the sustainability and ethical impact of an investment in a business or company. More specifically, ESG is a generic term often used in capital markets and is commonly practiced to evaluate the behavior of companies, as well as consider their future financial performance. We are seeing investors take social responsibility seriously by diligently researching companies’ ESG profiles and using ESG criteria to screen potential investments.”

Here’s a summary of what falls under the ESG umbrella.  

Environmental: waste and pollution, resource depletion, greenhouse gas emission, deforestation, climate, change.

Social: employee relations and diversity, working conditions, local community, health and safety, conflict.

Governance: tax strategy, executive remuneration, donations and political lobbying, corruption and bribery, board diversity and structure.

“The percentage of global retail and institutional investors that apply ESG principles to a quarter or more of their portfolios jumped from 48% in 2017 to 75% in 2019, according to ALVA, the leading solution for reputation intelligence, analysis, and media monitoring. In 2018, sustainable investing assets totaled $14.1 trillion in Europe and $12 trillion in the United States. Additionally, ESG assets in the U.S. are expected to reach $35 trillion by 2025. That growth shows just how important ESG practices are becoming in CRE, investing, and global business. 

Considering the value and importance placed on sustainable investing, CBC writes, “it is crucial to provide investors with accurate means to measure ESG performance and help identify ESG risks when going through the investment process. The Environmental Social and Governance factors are a subset of non-financial performance markers, which include ethical, sustainable and corporate government issues. This includes creating systems to keep the company accountable and actively managing the company’s carbon footprint.”   

CBC suggests some ways to incorporate and implement ESG practices at a company: 

• Create programs dedicated to hiring a diverse range of employees. 
• For example, ensuring that two-thirds of your newly hired employees are women and minorities. 
• Making sure there is a healthy percentage of female directors/females in leadership roles.
• Consider turning down deals in areas that are prone to natural disasters.
• Diligently research every company you invest in.
• Does the company’s portfolio have ties to weapons, tobacco, etc.?
• What are issues the company is passionate about? 
• Educate your employees on ESG practices and identify values or issues that are important to your company