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).


Beyond setting targets, it is critical that formal action is taken to deliver on climate pledges.

In addition to the growing list of net zero commitments, there is a simultaneous effort to strengthen ESG regulations among both financial institutions and business leader coalitions. In late 2020, the Federal Reserve joined the Network for Greening the Financial System (NGFS), a group of central banks collaborating on “climate risk management tools” for the financial sector (source). A few months later, the Trustees of the International Financial Reporting Standards Foundation (IFRS), a major accounting standard setting organization, outlined a proposal to implement new sustainability standards and create an International Sustainability Standards Board (ISSB) (source). Business leader coalitions have similarly expressed intentions toward stronger ESG regulations; in early 2021, 60 business leaders (e.g., Unilever, PayPal, and Sony) committed to the International Business Council (IBC) Stakeholder Capitalism Metrics, an international ESG disclosure framework (source).


 

Investor engagement increases to minimize risks and protect shareholder value as ESG funds outperform the market


As evidence mounts on the financial materiality of sustainability (source) and the positive impact of ESG on risk-adjusted returns (source, source), perhaps no group is more motivated to increase ESG disclosures than investors. With a fiduciary duty to minimize risk and enhance returns for shareholders, major investment firms, such as BlackRock, Inc., Vanguard® Investments and State Street Global Advisors, have expressed universal support to incorporate ESG risks and opportunities in investment decisions (source, source, source). Reflecting investor support in the real estate sector, 98% of the top 100 Real Estate Investment Trusts (REIT) (by equity market capitalization) reported on ESG in 2020 (source). Investors predict ESG will only become more critical throughout the next decade. In a 2020 BlackRock survey of 425 investors, respondents indicated they planned on doubling ESG AUM by 2025, shifting from 18% in 2020 to 37% in 2025; in Europe, investors expected ESG AUM to reach 47% by 2025 (source).


 


ESG reporting evolves as organizations seek to simplify reporting through standardization, higher data quality and better technology


Among investors, a long-held criticism of ESG reporting has been lack of standardization between reporting frameworks and unreliable data quality, leading to confusion on which assets are leading and lagging on ESG performance. Helping to solve this problem, the top ESG standard setting and disclosure guidance organizations are trending towards unification. For example, GRESB has structured its assessments to be in alignment with GRI, PRI, TCFD and SASB to improve standardization (source).


In a series of rapid changes within the industry to improve reporting, in July 2020, the GRI and SASB announced a collaboration workplan (source). Soon after, the CDP, CDSB, GRI, IIRC and SASB announced a shared vision on standards and disclosures for corporate sustainability reporting (source). In November 2020, the SASB and IIRC also announced their intention to merge into the “Value Reporting Foundation” (source, source). Going a step further, in April 2021, the European Commission presented a proposal for a Corporate Sustainability Reporting Directive. Amending the existing EU Non-Financial Reporting Directive from 2014, the new directive would not only require sustainability reporting for all large EU companies, it would also require companies to use both a standardized reporting framework and mandatory EU sustainability reporting standards (source).

 

ESG profession booms as demand increases rapidly for skilled professionals, while CSOs become an essential part of the C-Suite


As investor demand highlights the importance of sustainability, there is consequently a growing demand for experienced ESG professionals. Yet, because the ESG industry has grown so rapidly, there is currently a disparity in supply and demand for ESG talent. According to 2020 CFA Institute LinkedIn analysis, 6% of 10,000 finance sector job postings sought after sustainability skills, yet less than 1% of the million investment professional profiles assessed listed sustainability skills (source). ESG knowledge is not only lacking among investment professionals however (source), it is similarly lacking among asset managers. According to a 2020 survey of 150 global investors, 91% said they expected more focus on ESG in the next five years, yet 71% said “poor quality of performance information” from managers was a key barrier to making positive ESG allocations (source).


In an era of COVID-19, climate change and evolving social justice movements, it is increasingly important for corporate leaders to meet the needs of diverse stakeholders, to view issues through a resilience and systems lens and clearly communicate the quantitative impact of ESG practices (source). As a result, the Chief Sustainability Officer (CSO) is one of the most coveted ESG professionals. In contrast with CFOs and CEOs, CSOs are unique in their ability to strike a balance between sustainability and profit. With knowledge on which ESG practices are financially material for their industry, talented CSOs help corporations meet both financial and sustainability outcomes simultaneously. CSOs can also improve clarity with investors by harmonizing ESG disclosures with investors’ ESG data demands; indeed, among 100 institutional investors surveyed in Edelman’s 2020 Trust Barometer, the CSO was the second top position investors wanted to hear more from (source).


 


Health & wellbeing endures as organizations place a lasting focus on polices and building certifications to improve employee wellness

Given evidence that COVID-19 is largely spread indoors, 2020 helped accelerate an existing trend towards health and wellness initiatives in buildings (source). According to the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE), improved building ventilation can help reduce the concentration of COVID-19 virus in the air, hence reducing risk of transmission (source). To improve ventilation systems and sanitation practices, many corporations have sought after green building certifications throughout the pandemic to make buildings safer for customers and employees. In particular, interest in occupant health focused certifications like Fitwel® (from the Center for Active Design(CfAD)) and new WELL Health-Safety Rating™ (from International WELL Building Institute™(IWBI™)) skyrocketed; IWBI announced at the beginning of 2021 they had more than 1.5 billion square feet of real estate enrolled in WELL certification offerings, a 200% increase from a year earlier (source).


Recognizing the connection between healthy workers and improved financial performance (source), investors have also sparked a push towards stronger health and wellbeing standards in ESG reporting (source). Several studies, for example, have found improved health and safety practices can reduce employee turnover and increase productivity (source).


 

“S” in ESG becomes a priority as companies start taking social justice and human rights seriously


Diversity, Equity and Inclusion (DEI) is only one example of the strengthening of the social ESG piece in the past year. Following the murder of George Floyd in May 2020 at the hands of Minneapolis police, subsequent protests and social unrest swiftly raised the bar for corporate and investor initiatives around social justice, systemic racism and inequality. Throughout the latter half of the pandemic, several large companies stepped up to the plate to donate billions towards social justice causes (source). At the same time, poor corporate social behavior was put under a spotlight; Amazon, for example, was pressured to put a one-year moratorium on police use of potentially discriminative facial recognition technology (source). The social aspect of ESG was also emphasized among investors in 2020 (source). According to the US SIF report on US sustainable investing trends, the 2020 increase in social investing exceeded investment towards either environment or governance (source).


Alongside racial justice, a renewed focus on social issues in 2020 also paved the way for stronger human rights standards. Following George Floyd’s murder, the European Commission announced a mandatory human rights and environmental due diligence (HREDD) directive, and an outline proposal for the directive was approved in March 2021 (source). Recognizing the financial risk of human rights violations, investors have also pressured companies to improve. In February 2021, 208 institutional investors in the Investor Alliance for Human Rights (representing US$5.8 trillion in AUM) signed a statement calling out 106 companies on poor human rights performance (source). Likewise, the UN Principles for Responsible Investing (PRI) outlined a human rights agenda in 2020 that would increase human rights standards in the PRI reporting framework (source).

 


DEI drives innovation and performance as organizations commit to invest in social solutions


Though corporate DEI initiatives have been around since the 1960s (source), DEI is increasingly recognized as a key strategy to boost financial performance, attract talent, drive innovation and improve reputation. According to McKinsey’s 2018 Delivering Through Diversity Report, companies in the top 25% for either executive team gender diversity or ethnic/cultural diversity were significantly more likely to outperform on profitability (source). Another 2019 analysis of 3,000 companies from S&P Global found companies with female CFOs outperformed their sector average by US$1.8 trillion in gross profit and had larger stock price returns than male CFO counterparts (source). DEI is also emerging as a key talent acquisition strategy, especially for Millennials (source); as a result, the position of “DEI specialist” is increasingly sought after globally (source).


A greater emphasis on DEI is being reflected via policies among both financial institutions and governments. In 2020, Nasdaq began requiring most listed companies to have at one board member that is female and one that identifies as an “underrepresented minority and/or LGBTQ+” (source). In California, a 2020 law was passed requiring California-based publicly held companies to include at least one board of director from an underrepresented community; in 2018, California was the first state to mandate board-level gender diversity (source). At the federal level, President Biden signed an Executive Order in June requiring diversity among federal employees (source). This came shortly after the SEC announced in May 2021 they were looking into corporate DEI reporting requirements (source).


Along with regulatory pressure, there is also greater demand for DEI disclosures from investors. Large companies are already required to report DEI data to the federal government, but shareholders are increasingly asking companies like Nike, Walmart and Union Pacific Corporation (UNP) to publicly disclose DEI data (source). Similar to environmental data, publicly available DEI data will not only keep businesses accountable to social impact commitments but will aid investors in more accurately integrating DEI risk and opportunity data into investment analyses. Further driving accountability, there is also a growing trend away from broad, input-focused metrics (e.g., % women hired) and towards more nuanced, impact-oriented DEI metrics (e.g., reduction in gender pay discrepancy) (source, source).

 

Conclusion


From the pandemic to climate change and social justice movements, the past year has been defined by an intersection of record-breaking global sustainability crises. To bridge the gap between business as usual and a sustainable future, ESG has emerged as an effective agent for positive change, showing immense growth and evolution. As we move forward to create a healthier, more equitable and environmentally friendly future, it’s clear ESG will only become more central to decision making in both the private and public sectors.


 

About the Authors


Carli Schoenleber

Carli currently serves as a writer for Verdani Partners and the Verdani Institute for the Built Environment, where she is leading efforts on VIBE’s sustainable real estate textbook series. Carli has a decade of experience in the sustainability field, working across diverse roles in wetland science, environmental education, land use planning and conservation psychology research. She holds a B.S. degree in Environmental Science, Policy, and Management and a M.S. degree in Forest Ecosystems and Society.


Lindsay Clark

Lindsay currently serves as a Communication Manager for Verdani Partners and supports ESG communications for their 13 national and international client portfolios. With over 15 years of professional work experience, she endeavors daily to help shape the path towards a resilient, thriving future. Lindsay is a EcoDistricts AP and Fitwel Ambassador, with a M.S. in Urban Planning, a B.S. degree in Environmental Studies and a B.A. in French.