Unpacking ESG: Environmental, Social, and Governance

ESGStrategies & SolutionsResearch Insights
Written By Mason Interactive

As ESG continues to gain in popularity and importance, particularly within the real estate industry, it’s more critical than ever to optimize your strategy. We’re here to unpack it for you so you can understand what it is, how it’s evolving, and how Fitwel can help.

What is ESG? 

ESG definition: a framework for integrating and measuring Environmental, Social, and Governance issues pertaining to a business. 

An organization’s ESG strategy — also referred to as ESG standards — speaks to its core values and KPIs. Within real estate, ESG helps investors manage risk and measure the impact of their portfolio investments across the following three dimensions. 

Let's break it down, letter by letter.

E = Environmental

Areas of Concern

  • Waste and pollution

  • Resource depletion

  • Greenhouse gases

  • Climate change

  • Deforestation

  • A great example of an organization focusing on an environmental ESG strategy can be found in Disney’s environmental policies. Their whitepaper states “reducing [greenhouse gas] emissions is good for the planet and good for business.” Because of this, they have moved to a net zero greenhouse gas emission policy.

Real estate leaders primarily focus on reducing the environmental impact of their properties through energy efficiency and resource conservation. A great example of a real estate organization’s environmental focus is Manulife US REIT (MUST). Here is an excerpt from their 2021 Sustainability Report: “With the world’s real estate sector contributing about 40.0% of global carbon emissions, decarbonisation of the built environment is imperative in tackling climate change. MUST has developed GHG and energy reduction targets that are consistent with the Paris Agreement goal of securing global net zero emissions by 2050.”

S = Social

Areas of Concern

  • Employee relations and diversity

  • Working conditions 

  • Underserved communities

  • Health and safety

  • A great example of an organization focusing on a social ESG strategy is Warby Parker, which donates a pair of glasses to someone in need for every purchase. Their buy a pair, give a pair initiative focuses on the underserved communities aspect of the ‘S’ in ESG. Since starting the company, they’ve been able to donate over 10 million pairs of glasses to people in need throughout 50 different countries. 

In the real estate industry, Fitwel’s healthy building platform offers a viable entity-wide approach for consistently tracking and integrating people-centric metrics to quantify the “S” in ESG. In this Guide to Measuring ‘S’, Fitwel outlines 5 key areas and metrics for quantifying “S” in ESG reporting: Location, Operations & Performance, Amenities, Design, and Programming & Evaluation.

G = Governance 

Areas of Concern

  • Tax strategy

  • Executive remuneration

  • Donations and political lobbying

  • Corruption and bribery 

  • Board diversity and structure

  • Real Estate – Tenant Engagement

  • Real Estate – Benchmarking and data quality

  • A great example of an organization with a governance ESG strategy in place is Sompo Holdings, which is one of Japan’s largest insurance companies. Sompo’s governance policy includes “separating management supervision from business execution in order to reinforce the supervisory function of the Board of Directors and to accelerate business execution by delegating substantial authorities from the Board of Directors to executive functions.” 

Regularly assessing portfolio assets through benchmarking is a key component of good governance in the real estate sector. Premier real estate investment, operating and development company, QuadReal Property Group, offers a great example of this. They not only engaged with tenants through dissemination of a tenant satisfaction survey, but also benchmarked assets against the Fitwel Standard across 60 of their properties to better understand performance. QuadReal’s report, Health Drive Value in Real Estate, focuses on the role benchmarking plays in providing a gap analysis of design and operational strategies, and correlating them with data on tenant satisfaction and real estate value.

ESG Investment

Companies are investing substantial amounts of money into enacting ESG policies or investing in companies that already have an ESG strategy in place. Due in large part to the pandemic, there has been an even bigger push for companies to allocate resources to ESG. In fact, ESG assets are on track to exceed $53 trillion by 2025. Intent on maximizing value, profitability and return on investment (ROI), investors are some of the biggest stakeholders when it comes to ESG and enacting ESG policy.

A New Investor Consensus: The Rising Demand for Healthy Buildings, the largest health and wellness study of global real estate investment managers ever conducted, quantifies for the first time the extent to which the real estate industry is focusing on health and wellness in ESG investment strategies.

Sustainability vs. ESG

While there are similarities between sustainability and ESG, particularly within the ‘E’ of ESG, there are differences. Sustainability focuses on the relationship between an organization and the environment, while ESG focuses on the relationship between an organization and its stakeholders (customers, employees, investors). Another difference is that ESG standards are set by lawmakers, investors, and ESG reporting companies, whereas sustainability standards are set by science-based organizations such as the GHG protocol. 

The green building movement has traditionally focused on environmentally sustainable construction and operations within real estate (issues related to energy, water, and waste).  And while green-friendly design and maintenance practices continue to be critical, attention is shifting from a purely structural view to better understanding and optimizing for the health and well-being of tenants within buildings. 

“It took about ten years to create a consensus around the metrics defining the E (the environmental pillar), and this is currently where we stand when it comes to integrating health into the conversation. Yet, there is a growing demand for reliable metrics that define the role of health within the ESG conversation, and Fitwel is committed to supporting the effort to reach a consensus as quickly as possible, using what was learned from the environmental movement and what we already know about the connection between the built environment and health outcomes.”
– Joanna Frank, President and CEO, Center for Active Design.

Why is an ESG Strategy Important?

  1. Customers and/or clients value ESG when they search for goods and services. It is very likely that they could choose a particular product because of the organization's ESG policy rather than a company that does not have any policies in place. In order to stay competitive in the market, it’s essential to have some ESG strategy or policy in place.

  2. Employees value ESG in their job search. Millennials, which make up a majority of the workforce, are looking for purpose in their job search. They want to know the work they are doing is making a difference, and by working for a company that values ESG, that satisfies that urge. According to Forbes, “83% would be more loyal to a company that helps them contribute to social and environmental issues (vs. 70% U.S. average)”.

  3. Investors are heavily focused on funding organizations with ESG policies and those that have plans to implement ESG strategies for the future. With so many stakeholders involved in ESG, ESG investing has grown exponentially over the recent years.

The Value of ESG in Real Estate 

Within the real estate industry, having an ESG strategy is no longer a ‘nice-to-have’ but rather a ‘must-have’ that can boost ESG scores, mitigate risk and ultimately drive value. 

  • Having sound ESG, corporate social responsibility (CSR) and other sustainability-focused strategies in place help differentiate businesses, attract customers and ultimately improve the bottom-line. This is especially true in the built environment; real estate companies that focus on ESG, implement healthy building practices and achieve certification with Fitwel often report above-market rents and an overall increased ROI. 

  • COVID-19 illuminated the importance of optimizing human health and well-being across society. Within buildings, pandemic-driven prioritization of health and safety is now becoming a table stakes consideration for prospective tenants across commercial and residential real estate. In A New Investor Consensus: The Rising Demand for Healthy Buildings, 87% of office and 61% of residential real estate owners and investors reported tenants as the primary driving force behind the demand for healthy buildings. 

  • The acceleration of ESG investing in real estate continues to intensify, highlighting the need for reliable ESG data, reporting and increased regulation.

Fitwel’s Role in ESG 

Given the increasing demand from both tenants and investors alike, third-party healthy building certification systems like Fitwel will increasingly be relied upon for tracking and integrating health-related ESG metrics. Several leading real estate companies — many designated Fitwel ‘Champions' — have already been integrating Fitwel into their ESG reporting. The Fitwel Platform offers real estate owners a clear way to track health-related strategies and outcomes impacting ESG performance, more specifically the least-defined category, Social. 

Learn more about our commitment to helping the industry quantify people-centric metrics here: fitwel.org/esg

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