ESG – environmental, social and governance – you’ve likely heard the letters. For investors, these non-financial factors are finding a place in the process of determining potential risk and growth opportunities.
So what is it exactly? And where do you begin? As Bridge Industrial LLC Northeast Region Partner Jeffrey Milanaik put it, recalling his own experience delving into the world of ESG, “we didn’t know what we didn’t know.”
“I was able to raise my hand and define the terms,” he said on Jan. 26, moderating a discussion with Kara Edmonson, senior director of ESG for Verdani Partners, and Kerry Reef, a director at Liberty Mutual Investments, as part of NAIOP New Jersey’s virtual 2022 Annual Meeting & CRE Outlook. “And then the conversation sort of stopped.”
And with ESG, especially now, it seems like keeping the conversation going is the best place to start. For Milanaik’s company, that included engaging Edmonson’s company (He began the discussion by disclosing his professional involvement with both panelists).
Carlsbad, Calif.-based Verdani is a full-service sustainability and ESG consulting firm. According to the company’s website, it collaborates with its clients to come up with goals and strategies that align with that of their businesses.
“The first thing that you want to do is kind of look at where you’re at currently,” Edmonson said. “And you may know that you’re starting from scratch.”
She highlighted four factors to focus on when it comes to the environmental component of ESG: energy use, water use, the amount of waste you’re producing and emissions. “It is a really big topic with a lot of different pieces to it, but just in terms of tracking I think those … kind of are the main ones that you’d want to feature; get a handle on and get your arms around as you’re figuring out your building’s impact.”
The more “traditional” environmental concern of contamination, Reef added, should be taken into account as well. Not just for developments, but for acquisitions. “Just looking at the land on which the building resides and sort of looking at the ecosystem around it and any potential environmental impacts from the construction or activities at that property,” he said.
From Reef’s perspective, social issues are evaluated on two levels: that of the partnering company, and that of the asset in question. Liberty Mutual sends out due diligence questionnaires, he said, to partners that include social considerations around corporate responsibility, giving back and employee programs.
Diversity, equity and inclusion concerns are also included in the social component, he said. And attention is paid not just to “what is this company doing,” but “what is this company doing to grow and sustain these programs?” At the asset level, according to Reef, accessibility plays a big part.
Governance is really about the ways an organization holds itself accountable. Doing so can also be a great way to track progress.
“It’s the policies that you put in place in your organization to kind of standardize your programs. It’s having the right leadership … in place to make sure that somebody’s actually driving the program forward and checking in on how things go,” Edmonson said. “Reporting to make sure that you’re being transparent about your program and reporting out to the public.”
So where to begin? Perhaps one of the hardest parts of building an ESG profile is putting together the information. Edmonson suggests the best place to start is by figuring out what data is available. “There are places around the country that have benchmark ordinances in place that require buildings to submit whole building data to the city or the state,” she said. “And so in those cases you can get your whole building’s energy usage or even water usage sometimes. But a lot of times that’s not available.”
The Garden State offers a free Energy Benchmarking service through New Jersey’s Clean Energy Program, administered by the Office of Clean Energy within the Board of Public Utilities. Beginning in May 2023, as part of the state’s Clean Energy Act of 2018, owners and operators of commercial buildings that are more than 25,000 square feet will be required to benchmark energy and water use for their assets.
When the information isn’t available, Edmonson says leaders should reach out to property teams – or to even work with tenants – to see if they can provide the data. “It’s a continuing struggle,” she said.
Some companies may already be doing things that fit into an ESG program. “[Y]ou want to kind of look at, a kind of well-known sustainability framework and compare what you have in place,” Edmonson suggested.
It may be useful to survey stakeholders on what’s important them, which could help you to home in on where you want to go with ESG, and in what timeframe. Even a risk assessment, Edmonson added, could be a good thing to do early on in your process. The results can help you prioritize your goals—this way you can see what is more important to your specific business, and in the case of the risk assessment, what your potential exposures to climate-related risks are and how to mitigate them.
“And then the other piece … is benchmarking your progress as you go along,” she said. “So, starting to get those data coverage pieces in place is another really big early [component].”
Edmonson pointed to the Energy Star program for assets – a score of at least 75 will earn the designation. On the development side, she suggested modeling energy use by using LEED (Leadership in Energy and Environmental Design) standards.
So, there are specific standards you can peg your performance to, but Edmonson reiterated that the biggest hurdle is getting all the data together into a portfolio.
Milanaik recommended finding someone at your organization who is passionate about ESG to lead your efforts. “We have assigned a dedicated person within the company to keep us in line – if you will. And make us accountable to it. And for those that are going to embark on this I strongly would recommend that. And find somebody that’s passionate about the topic in your organization, because then they become extremely successful at tracking down folks like myself … and making us accountable, accordingly.”
Figuring it out
As with ESG efforts in general, the process of integrating these non-financial factors on the investment side is still evolving.
Reef stressed that it’s still fairly early in the integration process. Last year was big for ESG in investing, he said, but reporting is still developing as standards gain traction with partners and in the industry. “For our investments department as a whole we decided, at least in these early stages of rolling out ESG, it’s not going to be an exclusionary policy,” Reef said. “It’s not going to be the deciding factor for a single investment based on the issue score or the due diligence questionnaire, so it’s mixed in with all the other risk and rewards that we’re evaluating on every single investment.”
That being the case, the conversation is ongoing. “It starts with, is it part of the thought process? Is it part of investment decision-making? And then along the way … how can we add value?” Reef said.
And so perhaps the most important aspect of ESG is just to dive in and start talking about it. To build collaborative bridges to allow us all to build, well, better.
Trend is not the right word to describe what’s happening with ESG, Milanaik said, suggesting obligation is more appropriate, one to both society and the world.
“The good news is, it’s not a pass/fail,” Milanaik said. “But it’s a work in progress toward a real good end.”