COMMENT Talking to boards about the net zero transition and social impact in recent years, I have felt like Tom Hagen in the Godfather Part 1. He advises Vito Corleone: “[This] is a thing of the future. And if we don’t get a piece of that action, we risk everything we have. I mean not now, but… 10 years from now.”
His subject matter was the narcotics business, so somewhat different, but sustainability in investment portfolios is seen by much of the world as equally dangerous. Somehow, it’s always “10 years” until it makes genuine financial sense and this ever-rolling time frame risks encouraging apathy. As does what appears to be the global ESG exodus: we are seeing organisations no longer speaking about ESG and the many associated commitments and labels. Businesses and banks are leaving global net zero initiatives born out of previous COPs. The EU Omnibus of compliance rollbacks is feared by many to be carte blanche for cutting back accountability. Behind the scenes, ESG job titles have changed to “sustainability” or “responsible investment” in a bid to avoid the associated controversy.
New spotlight
Is ESG dead in the water? No. Streamlining reporting requirements today doesn’t affect the long-term legislative direction or the drivers for investment. Removing ESG from job titles doesn’t matter. This rebrand is just a distraction from the work my peers and I are doing to optimise building performance, upgrade equipment, lock in long-term value, save occupiers money and assist economic and environmental global progress.
We have more impetus to drive real impact than ever before, thanks to regulations increasingly requiring evidence of tangible action and frameworks measuring the right things. The EU Omnibus aims a laser-sharp spotlight on to a smaller number of companies with collectively the largest impact, and that’s OK. Their actions will continue to set the correct course. The direction of travel remains the same, and the level of rigour hasn’t been compromised.
ESG is, in fact, getting the momentum it so badly needs to reinvent itself. And here is how it will happen. Firstly, buyers will adjust their offer pricing to reflect building upgrade costs in line with future anticipated legislation. This is a growing trend we have seen, from clients requesting more comprehensive ESG due diligence work, including quantifying the costs of meeting future net zero regulations and physical climate risk resilience. The impact of sustainability on asset value will now stand apart from other asset “primeness” factors such as location, specification and amenities. Budgets to create well-retrofitted older stock that can compete with shiny new efficient buildings will be there from the get-go.
Secondly: ESG reporting to date has been focused on investor demand for user-friendly ratings. That focus on “measuring the measurable” has resulted in driving only the most basic action. Energy data collection, net zero audits, occupiers’ own often minor upgrades and nominal charity donations have, to date, been comfortably securing decent ESG scores for portfolios. This is not enough to make a big difference.
But I am optimistic that, despite the changing global political landscape, the tide is turning with UK sustainability regulation shifting focus towards action, and reporting frameworks evolving accordingly. The Sustainability Disclosure Requirements regime demands detailed transition plans and corresponding transparency.
One team
Finally, ESG professionals are now used to thinking commercially, with a proper understanding of the technical, operational and legal aspects of implementing sustainability initiatives.
More sustainability roles than ever are being created for the much-needed ESG asset management “bridge” and people in these roles can properly articulate the cost of missed opportunities on future performance, help manage risk and add value. As the economic case for sustainability becomes unequivocal, we will see property professionals seek closer direct collaboration with engineers, consultants, standard setters, community activators and nature protectors.
I predict 2025 to be the year when sustainability experts – whether internal or external – and investment professionals across the industry truly begin to work as one team, in close proximity, whether physically or remotely, structuring incentives and deals together. Welcome to the family.
Bára Melezínková is head of ESG strategy and stewardship at Hoare Lea
Image from Hoare Lea
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