Verdani Insights: Top 10 ESG Real Estate Trends for 2021-22

Authors: Carli Schoenleber and Lindsay Clark

Introduction

Unlike any event in recent history, COVID-19 brought society to a standstill. Not only did the pandemic reveal poor resiliency in our health and social systems, but it also put a spotlight on growing socio-economic inequality and long-standing social justice issues. Amidst a global pandemic, 2020 also marked a record-breaking year of climate-related floods, storms, heatwaves, and wildfires. With predictions that climate change impacts will only worsen, there is more pressure than ever on global leaders to move toward a carbon-free future. While disheartening, these converging crises have forced companies and investors alike to look beyond the next quarter towards the next couple decades as a critical window to reinvent our current business paradigm to account for climate change. This article presents the top ESG trends we have seen so far in 2021 that are shaping real estate strategies for the years to come.

2021-22 ESG Trends

  1. Climate Risk Disclosure Expands

  2. Biodiversity Conservation Grows

  3. Decarbonization Advances

  4. Regulations Strengthen

  5. Investor Engagement Increases

  6. ESG Reporting Evolves

  7. ESG Profession Booms

  8. Health & Wellbeing Endures

  9. “S” in ESG Takes Priority

  10. DEI Drives Innovation & Performance


Climate risk disclosure expands nationally and internationally as the climate emergency intensifies.

Following a pattern of accelerating and intensifying climate change impacts, 2020 marked a record-breaking year. In U.S. alone, there were numerous weather and climate disasters, with droughts, storms, cyclones and wildfires amounting to nearly $100 billion dollars of damage (source). Already, evidence shows many assets are at risk from increasing temperatures and more severe weather. According to S&P Global, a leading provider of independent credit risk research, around 60% of entities in the S&P 500 Index own assets that are at a high risk of climate-related physical impacts (source). Given predictions by the Intergovernmental Panel on Climate Change (IPCC), that climate impacts will only accelerate in coming years (source), there is growing pressure on investors to more accurately incorporate climate-related risks into investment decisions (source).


While lagging behind the European Union’s new Sustainable Finance Disclosure Regulation (SFDR), which came into effect in March 2021 (source), there are signs climate-risk disclosures could soon be mandatory in the U.S. In February 2021, the U.S. Securities Exchange Commission (SEC) released statement indicating they were actively working on climate-related disclosure guidance (source); a month later, the SEC went further to request public comment on climate-related disclosures (source). Dovetailing with SEC developments, President Biden signed an Executive Order in May 2021 which pushed the Financial Stability Oversight Council (which includes the SEC) to make a plan for increasing disclosures on climate-related financial risk (source). At the international level, the G7 announced support for mandatory climate-related financial disclosures per the Task Force on Climate-related Financial Disclosures (TCFD) following its June 2021 summit in England (source).


Biodiversity conservation grows in importance as mass extinction of species poses threat to humanity and global economy

Though climate change is predominantly viewed as the most urgent environmental issue, biodiversity conservation is arguably equally important to tackle in coming decades. We are currently witnessing a rapid and accelerating loss of biodiversity due to human activities, culminating in Earth’s 6th mass extinction (source). In just the 44 years between 1970 to 2014, 60% of Earth’s wildlife, 89% of Central and South American wildlife, and 83% of global freshwater wildlife was lost (source).


These losses are not only devastating from an environmental and social perspective, but also from an economic standpoint. The World Economic Forum estimated in 2020 that half of the world’s GDP (around US$44 trillion in economic value) is “moderately or highly dependent on nature” with construction among the top three most nature-dependent industries (source). Given the global economy’s foundational dependency on natural resources, further damaging ecosystems presents a serious risk to long-term economic prosperity. A 2020 estimate from the World Wildlife Fund (WWF®) suggests continuing down our current “business as usual” path will reduce the supply of six key ecosystem services (e.g., crop pollination, coastal flooding and erosion protection, water supply, timber production, fisheries, carbon storage), amounting to a US$10 trillion-dollar economic loss by 2050 (source). Despite the economic value of nature, a S&P Global Trucost analysis of 3500 companies (representing 85% global market cap) found among the 65% of companies aligned with the UN Sustainable Development Goals (SDGs), less than 1% aligned with SDG 14 “Life below water” and SDG 15 “Life on land” (source).


Fortunately, there are signs biodiversity conservation is rightfully growing in importance to companies and investors. Mirroring the widely endorsed TFCD, the Task Force for Nature-related Financial Disclosures (TNFD) emerged as a new initiative in 2020. Once developed, the TNFD will provide a reporting framework on nature-related financial risks, thereby shedding a quantitative light on the materiality of ecosystem conservation and providing greater incentive to invest in business practices that conserve and regenerate nature (source). Demonstrating motivation among global leaders, the 2021 UN Biodiversity Conference (COP 15), taking place in October 2021 and Spring of 2022, will aim to set new biodiversity goals for the next decade and outline an implementation plan to radically transform humanity’s relationship with nature by 2050 (source).



Decarbonization advances through net zero commitments as a necessary pathway for lowering emissions to stabilize Earth’s climate

In 2018, the IPCC confirmed that to limit global warming to 1.5°C, the world needs to halve CO2 emissions by around 2030 and reach net-zero CO2 emissions by 2050. (source). The IPCC 2021 Climate Report shows that the world will probably reach or exceed 1.5 degrees C (2.7 degrees F) of warming within the next two decades. Whether we limit warming to this level and prevent the most severe climate impacts depends on actions taken this decade. (source).


Joining other countries that are making net zero commitments, President Biden rejoined the Paris Agreement on his first day in office and committed the U.S. to net zero emissions by 2050 and a decarbonized power sector by 2035 (source). Though time will tell if congressional action will align with Biden’s net zero commitment, the private sector is already moving towards a net zero future (source). Today, 20% of the top 2,000 publicly traded companies have already made net zero commitments. Across corporations, governments, states and cities, total net zero commitments cover approximately 68% of global GDP (measured in purchasing power parity (PPP)) and 61% of global emissions (source). However, these optimistic policies and pledged targets are not enough to keep temperature rise below 2 degrees. To appropriately address the climate crisis, we must focus on bold and immediate action. Beyond long-term goals, it is also critical that climate pledges include immediate metrics, address historic emissions and create benchmarks that allows for better accountability (source).



Industry regulations strengthen as carbon neutrality pledges grow globally and new standards enforce accountability

As time runs out to avoid the catastrophic impacts of climate change, 137 countries have committed to carbon neutrality, as tracked by the Energy and Climate Intelligence Unit (source) and confirmed by pledges to the Carbon Neutrality Coalition and recent policy statements by governments (source).