Investing In Your Building Through ESG

BY JOHN SALUSTRI

(This article was originally published in the May/June 2020 issue of BOMA Magazine.)

Times of crisis shine a spotlight on how businesses are impacting their employees, customers and communities. During the COVID-19 pandemic (still a very present concern as of the publication of this article), companies across the United States are being held publicly accountable for their handling of the crisis. At the same time, investors are taking a hard look at where their money is safest.

Already on the rise in recent years, ESG principles may be entering a golden age, especially in commercial real estate. Responsible investing today almost by definition is based on Environmental, Social and Governance precepts. These are the three central categories used to evaluate socially conscious investing. These types of investments are not only particularly appealing to young investors, but they also are frequently associated with higher rates of return, according to analysis by Harvard Business School. We are all likely to hear the term “ESG” much more in the coming months and years.

Not surprisingly, institutional investors, answering to their stakeholders, have been on the forefront of this growth. The implications for property managers that arise from this three-pronged expectation is clear, because the ESG rubber meets the road in your day-to-day building activities.

THE ABCs OF ESG

First, let’s study some history. ESG investments first took root in January of 2004, says Georg Kell, writing in Forbes magazine. That was when then-United Nations (UN) Secretary-General Kofi Annan rallied global CEOs “to find ways to integrate ESG into capital markets.” As of 2018, Kell states, ESG investments totaled $20 trillion, about a quarter of all professionally managed assets.

One major outcome of that UN initiative was a 2005 conference report tellingly entitled “Who Cares Wins,” in which the actual term ESG made its debut. It provided a checklist of standards for environmental, social and governance expectations. (See “Back to Basics,” right.) But, it wasn’t an immediate hit, writes Kell, with pushback from institutions arguing that their fiduciary responsibility stopped well short of environmental or social concerns.

The tide began to turn with rising awareness of such issues as climate change, as well as the availability of better data to prove that “good corporate sustainability performance is associated with good financial results.” And, while sometimes the link between asset value and ESG investment standards can be a little squishy, the dictate to perform to the expectations of responsible investors remains.

BACK TO BASICS

What does it take for a commercial property to meet the ESG parameters for responsible investment? Certainly, the structure is meant for all sorts of investment strategies, well beyond the confines of physical assets. Let’s go back to the beginning, to 2005, to see the general guidance for investors of all types as laid out in the groundbreaking conference report “Who Cares Wins.”

ENVIRONMENTAL ISSUES

  • Climate change and related risks • Reducing toxic releases and waste
  • New regulation expanding the boundaries of environmental liability with regard to products and services
  • Increasing pressure by civil society to improve performance, transparency and accountability, leading to reputational risks if not managed properly
  • Emerging markets for environmental services and environment-friendly products

SOCIAL ISSUES

  • Workplace health and safety
  • Community relations
  • Human rights issues at supplier or contractor premises
  • Government and community relations in the context of operations in developing countries for environmental services and environment-friendly products
  • Increasing pressure by a civil society to improve performance, transparency and accountability, leading to reputational risks if not managed properly

CORPORATE GOVERNANCE ISSUES

  • Board structure and accountability
  • Accounting and disclosure practices
  • Audit committee structure and independence of auditors
  • Executive compensation
  • Management of corruption and bribery issues

ESG GOES TO WORK

And, that brings us to the here and now. It should be noted that, while the most accessible leg of the ESG stool is the “E,” it can be tricky to separate the E from the S, given that social factors will touch on such concepts as tenant health and wellbeing.

That said, general lines can be drawn. For the most part, “E is pretty cut and dried,” says Sara Neff, LEED AP EB:O+M, Fitwel Ambassador, WELL AP, Kilroy Realty Corp.’s senior vice president of sustainability. “It entails energy, water, carbon emissions and waste.” (See “E Is for Environment,” below.)

Moving on to S: “At Kilroy, one very important part of the social aspect of ESG is giving our buildings more active design features—like opening stairwells for exercise,” she continues. “It’s creating a walking path outside and better access to light.” But, there’s more to it than that, she adds, including “anything that fosters better relationships with our tenants and helps us develop stronger tenant-facing programs, which can lead to higher retention.”

In terms of governance, the keyword here is transparency. Neff reports that, in the past year, Kilroy’s board of directors has created “a corporate social responsibility and sustainability committee, so now I report to the board of directors every quarter. It’s a trend property managers will have to wrangle with.”

“Governance is the part of ESG no one really talks about,” jokes Jason McIntyre, LEED AP O+M, FMP, director of Real Estate Operations and Sustainability at USAA Real Estate. “But, it simply means abiding by the law in what has become a somewhat highly regulated environment. We’re obligated to meet certain governance and oversight checks and balances. In essence, we’ve made a commitment to our investors, our tenants and other stakeholders that we’re doing the right thing and demonstrating it through transparent documentation and reporting.”

Note that he included tenants in that mix. Becca Rushin, BOMI-HP, CEM, LEED AP O+M, vice president of Sustainability and Corporate Social Responsibility at Jamestown Properties, agrees that governance not only points up the chain of command, but out as well—to the occupants that are at the heart of value enhancement. “Our property managers are in constant contact with our tenants in terms of keeping them up to date on operational considerations,” says Rushin. That connection also helps Jamestown management get vital feedback and allows them to stay in tune with the needs of their occupants, she adds.

YET MORE WORK?

Property managers have been ramping up on their environmental performance for years now. As sustainability concerns evolved, so too did the skill set of the industry. The same can be said of social outreach, as leased spaces morphed from a product to a service and the physical building asset grew to be seen as part of the larger community (more on that shortly).

But, the governance issue—the need to document and prove what management websites claim—can be perceived as another burden on a property manager’s already packed schedule. “That’s the nature of the beast,” says Brenna Walraven, BOMA Fellow, BOMI-HP, CPM, RPA, president and CEO of Corporate Sustainability Strategies, Inc. “That managers are doing more with less is a trend that’s only on the rise. But, instead of creating a whole bunch of new processes, reports and programs, a much more efficient approach would be to feather in the various aspects of ESG into your existing activities.”

For example, she suggests taking a critical look at your property inspection lists and “folding ESG elements into that process.” But beware, she warns. “Are your teams trained sufficiently to provide actionable feedback on this new set of criteria or are they just checking the box?”

If it’s the latter answer, a ploy simply to hang an environmental efficiency plaque on the door, she says, “It is only a proxy for quality management, for doing the right things properly and aligning the interests of all of your stakeholders. You need to know that your team is really thinking about these things. Best practices need to be embedded into the business and feathered into existing policies, programs and processes so they happen as a matter of course and they’re not overwhelming your people.”

Big-picture training can help management staff over the learning curve, as Jamestown’s Rushin reports. “When we started benchmarking our energy, water and waste performance, it was really on a voluntary basis,” she says. “Now, it’s been about a decade, and we’re required to report our energy performance in almost all of our markets. Rather than treating ESG as something extra, over the years we’ve tried to institutionalize our practices so it’s become simply how we operate.”

At the property level, she says, a staffer may not need to know the big-picture context, but it helps. “It’s important for them to understand that their day-to-day jobs have an impact both on the environment and Jamestown’s ability to communicate what we’re doing.”

She adds that the governing bodies that dole out environmental performance surveys, such as the U.S. Green Building Council and the U.S. Environmental Protection Agency, have begun to eliminate needless repetition in their processes. “A lot of these transparency surveys have begun to sync up their questions, which has been great for people like me, because ultimately I’d like to spend less time on reporting and more time promoting new initiatives, getting projects implemented and supporting our teams.”

E IS FOR ENVIRONMENT

It should come as no surprise that, when it comes to the “E” of ESG, the firms represented in this article are among those at the head of the pack. Here’s just a sampling of their environmental track record:

Jamestown: In 2019, Jamestown, an ENERGY STAR® Partner of the Year, earned an “A” rating in the UN-sponsored Principles for Responsible Investment, an investor initiative created in partnership with the UN Global Compact and the UN Environment Programme Finance Initiative. The firm also was recognized as a Gold Level Green Lease Leader by the Institute for Market Transformation. In addition, it garnered eight new LEED certifications and recertifications and 10 ENERGY STAR labels, with an average score of 85 out of 100. Also, since 2013, the Jamestown Premier Property Fund has garnered a GRESB 5 Star rating, placing it in the top 20 percent of all respondents.

Kilroy Realty:In 2019, the REIT reduced energy consumption in its office portfolio by 1.8 percent and cut water consumption by 5.6 percent. What’s more, 70 percent of Kilroy’s portfolio is ENERGY STAR certified under a new, more rigorous scoring system. The firm ended the year with more Fitwel certifications than any non-government landlord, with 19 certifications across 43 percent of its portfolio. Finally, its recycling diversion rate increased from 40.4 percent to 41.5 percent.

USAA: In the past 17 years, USAA has garnered $25 million in energy savings alone from sustainability best practices. Since 2000, the firm also has achieved a 51 percent cumulative energy savings. It also boasts LEED certifications for 72 percent of its total portfolio.

THE SOFTER SIDE OF ESG

If governance is the leg of the stool no one wants to talk about, the most nebulous part has to be the social aspect. There are so many factors that go into tenant retention— the primary measure of a successful strategy—that linking cause and effect can be like nailing Jell-O to the wall.

Retention isn’t always in the hands of the tenant in the building, but it can also be determined by a distant corporate mandate. “ESG is a valuable exercise,” says Joe Markling, BOMA Fellow, CPM, CRCMP, RPA, managing director and head of Real Estate Operations for USAA. “But, I question if it has a direct correlation to tenant retention at this time.”

Nevertheless, social activities increasingly figure heavily in ownership’s to-do lists, and they’re reaching far beyond property confines to touch the greater community. Jamestown, for instance, is currently working with Georgia Organics to launch a program called Food Fight GA to support farmers and other industry workers. This comes in addition to charitable events for a variety of nonprofits, such as the James Beard Foundation.

The same with Kilroy, which on an annual basis supports at least one employee volunteer event in each of its four regions. These have ranged from beach cleanups to supporting victims of domestic violence. (A Kilroy fun fact: In one recent two-hour period, Los Angeles-based Kilroy staffers collected 2,256 cigarette butts from a local beach during a clean-up event.)

As for USAA, McIntyre reports that, in addition to its own corporate efforts, such as a recent donation to the San Antonio Food Bank, the firm supports its tenants’ various community outreach initiatives. To that extent, he says, “Our tenants and property managers are an extension of us.”

[W]e’ve made a commitment to our investors, our tenants and other stakeholders that we’re doing the right thing and demonstrating it through transparent documentation and reporting.


Jason McIntyre
Director of Real Estate
Operations and Sustainability
USAA Real Estate

ESG IN A POST-COVID WORLD

Such community activism becomes a critical factor in the industry’s response to the COVID-19 pandemic. The essential question becomes how to engage in social best practices in the age of social distancing? Still in the midst of the crisis, it’s hard for real estate professionals to characterize how the situation will alter their long-term approaches, beyond some obvious projections.

As Kilroy’s Neff points out, “We’re still in the process of finding out what that impact may be. There will likely be a heightened focus on cleaning and janitorial services once we get back to the office. Also, with many of our tenants working remotely, which reduces energy and water consumption in our buildings, I’m concerned about measuring the impact of efficiency upgrades.”

“Besides tragic human and economic losses, the lack of social interaction is the biggest challenge,” says Walraven. “People are meant to connect and engage.” Luckily, she adds, we’re also in the age of technology, and if we can’t meet face to face, at least we can Zoom. “That’s the one good thing. We have the technology to replicate face-toface meetings.”

And then, she ventures out a little further along the what-ifs limb, projecting that the current restrictions on human interaction are likely to inform how we work going forward. “We’ll be working differently,” she says. “There will be less travel, more remote working options and there will be an even bigger rise in the healthy buildings movement. Fitwel, the WELL Building Standard, Harvard’s 9 Foundations of a Healthy Building and similar applications will be more of a focus.”

Already, the Class A buildings typical of the portfolios of institutional owners are responding to the heightened need for sanitized workplaces. “Industry best practices include updates to all cleaning processes to make sure such things as sanitizing door knobs are accomplished,” says McIntyre. “Going forward, many will likely be making investments in such amenities as touchless restroom fixtures and even additional day porters.”

Smartly managed, this can all be done with a potential decrease in operating expenses, Walraven adds, pointing to the cost savings inherent in more energy-efficient building systems. “It’s been proven consistently that there are no-, low- and mediumcost measures that will not only pay for themselves, but also cover such expenses as additional custodial services.”

And even assuming they don’t, “tenants are generally willing to pay for safety,” she says, “just as they paid for the peace of mind of additional security measures after 9/11.”

If, as stated before, a property management staffer was inclined to simply “check the box,” it’s a shortcut that frankly won’t fly in the 2020 rendition of the new normal. “What are you doing to keep your buildings healthy and safe?” Walraven asks. “What are you doing to keep your tenants happy, to support their businesses and help them be successful in every way that a real estate owner and operator can?”

And, how are you communicating your initiatives and your successes to all involved stakeholders? Answer those questions properly, and you’ve tagged every base in the ESG diamond.

ABOUT THE AUTHOR: John Salustri is editor-in-chief of Salustri Content Solutions, a national editorial advisory firm based in East Northport, New York. He is best known as the founding editor of GlobeSt.com. Prior to launching GlobeSt.com, Salustri was editor of Real Estate Forum.

 

This article was originally published in the May/June 2020 issue of BOMA Magazine.

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