How to embed the E and S into corporate G

The G of ESG is often the least talked about of the three letters that so many agree are driving real estate today. Why is this? Is it because – as recent EG Future Leader and Catalyst Capital analyst Thai Dang said – it can be a little dull? Or is it because – as UK Green Building Council chief executive Julie Hirigoyen pointed out at EG’s most recent ESG summit – it is how we do business, which we have been doing for centuries, so it does not need the column inches?

The answer probably sits somewhere in the middle. Corporate governance is not going to set the world alight and it is something that (most) businesses have got a handle on. But how many businesses have actually managed to embed positive environmental action and social value into their corporate governance and how many are just being led by regulation?

Earlier this year, outdoor clothing and equipment company Patagonia – the first B Corp and the poster child for responsible business – announced that Earth would now be its only shareholder and that any profits not reinvested back into the business would be invested in planet-protecting and nurturing ventures. It was a move that completely embedded environmental responsibility into the business model.

Finding inspiration

It was a very Patagonia move, but could it – should it – ever be replicated in the real estate sector? The answer, like the above, is probably somewhere in the middle. Should it? Yes, of course. Could it? Probably not as easily, said Hirigoyen, as it would mean turning the real estate sector on its head. No more building – only utilising what we have already got. We are seeing more of that but can it be only that? Unlikely.

So while the Patagonia-esque shift to embed E and S into the corporate G might be a bit too much to ask for, what could real estate businesses be doing and where (else) could they look to for inspiration?

For Alfa Energy Group principal consultant Dr Seyed Ebrahimi, the shift to just doing the right thing and almost forcing that action has to come from the major players. He cited the automotive sector as an example.

“The automotive sector showed us there were initiatives taking place on the ground by the big players and that, from an institutional theory perspective, peer-pressured competitors in that sector to follow suit,” said Ebrahimi. “Government then looked at those pressures when it became normalised and started setting black and white institutional regulations.”

If the big players in real estate started leading the way – many of which have – and the financial story underscored the validity of those moves (which as more assets become stranded, it likely will) others would follow suit and government sticks to force the tail would come next.

“Regulations are always a very systematic review of government looking at best practices in a particular sector,” added Ebrahimi. “They have to look at what the big players are doing in that sector, and then try to translate that into frameworks and mandates.”

If that doesn’t happen, if businesses do not start taking action, he believes there is a “huge risk” of being left behind.

Writing on the wall

UKGBC’s Hirigoyen said there were already big gaps forming because proper regulation was not yet in place.

But for her, those big players have started to lead the way.

“Yes, the regulations are not there now and, yes, the capital is not asking necessarily as challenging and stringent kind of requirements now,” said Hirigoyen. “But more and more investors and lenders and various others can see the writing on the wall. Real estate is in danger of being on a cliff edge.

“When it comes, it is going to come really quickly because all of the divestment from buildings that just can’t make it to net zero carbon will happen very fast. Lots will be left with stranded assets on their books. That is starting to dawn on people and on the financial institutions in particular.”

And when it comes to corporate governance and the running of our businesses sustainably, money talks.

“Quite a lot of clients would sit there and wait for a particular regulation to hit, but they have to appreciate that if you do not take those sorts of initiatives in a timely manner, you will end up paying quite a lot and having to catch up,” said Ebrahimi. “Whereas if you do take certain initiatives with you, look at the best practices, develop those KPIs for yourself internally and match them to your competitors, then you will be in a position of providing them to your followers as intellectual property.”

And this is where the real estate sector could look outside of its own boundaries and to other sectors for inspiration – to the automotive sector and how it has perfected the dismantling and disassembly of cars, with every panel accounted for – and how that could potentially be applied to buildings. To Patagonia, for making the planet the ultimate shareholder, so that every financial and business decision you make is for the benefit of Mother Earth.

Hirigoyen put the need for more talk, more understanding of the importance of good governance, most simply. For her, governance is the enabler. It enables measurement and accountability which should propel us forward when it comes to environmental action and delivering on social value.

But a killer question remained.

“How do you bake this into the way you make decisions on a daily basis?”

The answer, she said, is by piggybacking off the things we know already that make a business work and by making sure the environmental and the social are as important as the financial drivers.

“For me, that is what governance is,” said Hirigoyen. “And we have been running businesses for centuries, so we know how that bit works. We just don’t integrate it effectively.”

Or not yet, at least.