Sustainability, ethical impact, social responsibility – these are all terms, as business leaders, we’re very familiar with. They have become part of our executive lives, decision making factors, regularly part of strategy frameworks and project outlines.
In the business world, the bar for selecting companies, projects or initiatives to partner with is continually getting raised. Everyone wants more, expects more.
This is particularly evident in the investment market. Long gone are the days of simply looking at the financial return of a business opportunity. Increasingly, the criteria for investment involves a wider range of issues and metrics that help shape an investment portfolio.
What I’m referring to is known as ESG – Environmental, Social and Governance, the three central factors in measuring the sustainability and ethical impact of an investment.
At the recent Institute of Directors conference, Michelle Edkins, Managing Director at BlackRock (the world’s largest funds manager) highlighted how they are actively applying the principles of ESG (Environmental, Social and Governance) in all investment decisions.
BlackRock is not alone. In a world increasingly focused on these factors, companies are more closely scrutinised on how their core business strategy and operations effect the wider community, far beyond their economic contribution. In New Zealand, even the NZX has published guidelines on ESG reporting.
In a recent article Hamish Macdonald, NZX Head of Policy and Legal recently said “NZ corporates need to come ‘up to speed’ in ESG disclosure, which is increasingly seen as standard practice in other jurisdictions.”
The NZX guideline highlight clearly why this type of information is becoming so vital to not only investors, but all executive decision makers, “All over the world, companies and entities are coming to report on ESG and responsible investment. These trends reflect the need to shift to a low carbon economy, increasing business vulnerability to the effects of climate change and other environmental and social factors, a generational changeover and institutional forces.”
John Berry, CE of Auckland based Pathfinder Asset Management, a responsible investment specialist, also pointed out that wider scope of ESG and the opportunity of adopting and reporting on these aspects of business practice in this week’s Sunday Star Times.
“Social reporting (ESG) covers a wide range of factors including health and safety, staff training and community engagement.”
How will ESG effect the commercial property sector?
This increasing focus on ESG and related initiatives is for obvious reason not only effecting the investment sector, but all organisations and key business decision makers.
But what does it mean for the commercial property sector?
At the moment, when actioned on behalf of our clients to help select a landlord, developer or investor to enter into a commercial arrangement, we focus primarily on their:
- Track record and experience
- Financial capacity
- Access to in-house and external resourcing
- ‘Fit’ with the client’s project objectives and values
You could argue that the ‘fit’ category goes some way to considering the wider ESG issues, but in hindsight, in today’s world, I don’t think it goes far enough.
So as we move forward, I expect we will be digging a lot deeper and asking investors and developers to demonstrate their commitment to ESG principles – in their business strategy, operations, procurement and project planning and delivery.
John Berry from Pathfinder Asset Management also highlighted how the property industry are starting to get their heads around the issue, “A property company that designs its shopping centres with the wider community in mind attracts more customers and builds stronger branding, which in turn means a more successful and profitable development. Similarly, any company (not just listed a property company) that values and upskills its workforce will have more productive and committed employees,” says Berry.
Making ESG a priority in your next property move
How might ESG effect a commercial tenant (public or private sector) looking to take a long term lease or partner with a building developer or investor?
When we manage a procurement process for a client we evaluate the options against a range of issues/criteria. These are hinged off the Strategic Brief, initially developed with the client and will typically include a range of financial and non-financial criteria.
The financial criteria will look at the effective cost(after adjusting for incentives) and the whole-of-life cost on a present value basis for example. The non-financial criteria will include issues like location, fit with brand, building quality, seismic performance, programme and risks and increasingly the fit of the developer and the experience of their team, when a new or refurbished solution is being considered.
These criteria have evolved over time. Pre 2010, the industry didn’t even think about seismic. Now it features high up in any evaluation criteria. Likewise, sustainability/green building initiatives now feature for many clients and projects. And increasingly in Auckland, location economics (the analysis of the cost/benefit of choosing a particular location for your business) is becoming a more important consideration.
So does the consideration of ESG as a top criteria reflect the next step up in our sophistication?