COMMENT ESG in real estate has grown stronger, not weaker, during Covid, offering a broader perspective of business performance. But even as the industry embraces ESG with enthusiasm, the range of issues tucked under the “governance” heading grab less of the limelight. However, recent months have shown just how important these issues are.
There is no doubt that commercial real estate has accelerated environmental priorities, with many businesses showing leadership with net zero commitments in supporting Paris Agreement targets. While it hasn’t had the same billing as climate change action, businesses at the top of their game have also championed social value.
What we hear less of is the role of good governance in saving the environment, society and the economy. But when it comes to ensuring capital, society and the environment are in trusted hands, governance is central and as important as sound environmental and social purpose. Covid has demonstrated the interconnection between environmental, social and governance management and highlighted the importance of traceability through reliable data.
Good governance offers certainty in uncertain times. While dealing with cash management and financial stability, the crisis has involved boards in tough decision-making, around dividend payments, executive remuneration, employee health and safety, redundancies, political lobbying, balancing customer and company stresses, and supply chain disruption. There has also been growing public scrutiny, as expectations of corporate citizenship have accelerated. Companies’ financial performance is no longer disconnected from a broad range of stakeholder issues which are sources of risk and opportunity, delivering competitive advantage.
Relationships between business and the broader environment are changing. Boards are concerning themselves more than ever with their stakeholder relationships – communities, employees, customers – alongside the voice of investors who are themselves increasingly interested in these relationships – and the balance of distributed wealth between them all. As Larry Fink put it in his 2021 letter to CEOs: “The more your company can show its purpose in delivering value to its customers, its employees, and its communities, the better able you will be to compete and deliver long-term, durable profits for shareholders.”
The impact of the pandemic has not hit equally across the board. Reporting indicates that Black, Asian and minority ethnic societies have suffered disproportionately when it comes to job losses, and that women have fared worse than men.
Change is afoot
Commercial real estate is not alone in being an industry where these inequalities are reflected in boardrooms and beyond. Change is coming; the number of board seats filled by women has increased significantly in the past 10 years but ethnic diversity is still notable by its absence.
Better representation has to happen, not just because it is right that our boardrooms properly reflect the society we serve, but because diversity of perspective in decision-making is crucial in assessing risk, understanding customers, unlocking community engagement and driving a balanced distribution of wealth.
Governance is also core to ESG disclosure, providing the opportunity to address these multiple concerns in a structured way. Where the frameworks once focused on environmental risk pathways, they are now increasingly concerned with oversight, purpose, transparency, labour practices and ethics. They are evolving still further to include diversity and inclusion, the employee voice and social equity.
Disclosure of high-quality reliable public information sits at the heart of financial and non-financial performance as the basis for assessing a company’s management of all its risks.
Benchmarks are influencing the allocation of capital in favour of companies that can demonstrate how they are actively manage the risks.
Aligning with a recognised standard is key if companies are to judge their activity against their peers, design pathways for improvement and provide investors with the means to judge performance in a modern-day business environment.
The range of frameworks and voluntary standards have provided stepping-stones to responsible performance. Looking forward, consolidation is needed. That will make it easier for companies to determine which to follow, and easier for financial institutions to draw an objective view based on comparable data. Common ground will optimise the potential that metrics can deliver.
Strong corporate governance indicates strong corporate culture, which in turn signals robust long-term resilience. Larry Fink now focuses less on governance in his CEO messages; not I believe because it’s any less important, more that strong governance is now considered what’s been called “table stakes”.
Vivienne King is a real estate industry leader and non-executive director
