History books will likely reflect on 2020 as a year in which life and death matters were on the line. As the world faces a deadly pandemic and an increasing awareness of systemic social and racial injustices, people and corporations have faced genuine existential threats. Investors and businesses are forced to adapt to this new world in which it matters deeply how quickly you can respond to risk and behave in a crisis. 2020 is also the year that has driven home the importance of incorporating Environmental, Social and Governance (ESG) into all business and investment decisions.
The disclosure of a company’s ESG progress and policies suddenly seems more important than ever, especially on vital social issues like racial equality, workplace safety, and access to healthcare. But what happens when the pandemic dies down, the media turns its attention away from the Black Lives Matter movement, or the economy returns to normal? As social issues become a greater concern, will we continue to care as deeply about the sustainability policies around a particular piece of real estate?
The pandemic is posing unique challenges for businesses. It’s forever changed the way we work, the way customers behave, and the way supply chains function—all while forcing us to mine for and interpret all sorts of new performance metrics. And these challenges have made investors more likely to exercise greater scrutiny in whom they choose to invest.
Sunil A. Misser, CEO of AccountAbility, says it is the advancement of social and governance topics that will most directly affect business continuity and resilience in the current global business environment. These are the issues driving economic disruption, social unrest, and, ultimately, performance. Inefficient corporate structures, deficient risk management strategies, and inflexible mindsets all contribute to the severe financial crisis we face.
“Governance, as we understand it—the internal system of processes, controls, and procedures that an organization adopts to govern itself, make effective decisions, comply with the law, and meet the needs of external stakeholders—will have to undergo a radical transformation to survive,” Misser says. “In the process, aligning ESG priorities with executive compensation, decision making at the board and executive levels, and leadership performance measurements will likely become more commonplace.”
AccountAbility also expects to see diversity, equity, and inclusion become more visible and integrated with corporate agendas—particularly in the real estate sector.
“The sheer scale of the real estate industry as the single largest contributing sector (13%) of US GDP, alongside the inherent ESG risks associated with property development and management, makes ESG disclosure both necessary and critical,” Misser says.
Misser notes that a recent proxy season study showed that over 50% of institutional investors surveyed consider ESG issues to be top corporate management priorities. However, when it comes to private real estate investors in North America, 80% of those surveyed by PERE in 2019 expected companies to have ESG policies and disclosures in place.
“We’re seeing a renewed focus on stakeholder engagement, demonstration of proactive ESG risk management for post-pandemic recovery planning, and recognition of the social responsibility and obligations of the real estate industry,” he says. “This pandemic really highlights the need for ESG management and disclosure in the real estate sector.”
“Governance, as we understand it, will have to undergo a radical transformation to survive.”
Sunil A. Misser
Renee Walker, a senior analyst with AUM wealth manager Spinnaker Trust, agrees that the coronavirus crisis has accelerated ESG investments. Companies with a commitment to ESG are attracting unprecedented amounts of cash. According to investment data firm Morningstar, net flows for sustainable funds reached $10.5 billion in Q1 2020—easily eclipsing the previous quarterly record set in 2019’s fourth quarter.
Walker says environmental and governance issues were front-and-center in ESG investing before the coronavirus pandemic and the Black Lives Matter movement came back into the spotlight, combining to completely rewrite the cultural and economic landscape. But she adds that these new forces won’t necessarily cause investors to de-emphasize sustainability altogether.
“This doesn’t mean investors will lose focus on the environment,” she says. “Environmental issues have not gone away and are getting worse every day. Plus, they factor into social-related issues,” Walker says.
Environmental problems often accelerate existing social issues, and vice-versa. Adverse changes to the environment often have an outsized impact on more vulnerable communities, as real estate and tech investor Noble A. DraKoln enumerates.
“Environmental issues disproportionately impact black, Indigenous, people of color (BIPOC) and Latinx in such a way as to impact not only quality of life but also their mental health,” DraKoln says. “Things like poor food, water, and air pollution are a constant stressor in their day-to-day lives.”
For example, he points to the social and environmental “atrocities and subsequent cover-up” that occurred in Flint, Michigan, where a public health crisis started in 2014 when the city’s drinking water source became contaminated.
“Environmental issues disproportionately impact black, Indigenous, people of color (BIPOC) and Latinx communities.”
Noble A. DraKoln
“This crisis is very much a product of the intersection between a lack of care in both the social and environmental categories of ESG,” DraKoln says. “True social improvement cannot happen as long as environmental inequality persists.”
The rise of social and governance factors has shown that E, S, and G are equal partners in achieving a more just, equitable society. If we’re going to truly overcome the challenges that came to a head this year, our society and economy must not just build back up—it must build back better. Returning to the pitfalls of a pre-pandemic world where these factors were less important is not an option. Real estate companies can no longer afford to ignore ESG if they want to stay competitive in the industry—just as our society can no longer afford to ignore climate change, or tolerate social injustice.