How real estate organizations can build a better ESG plan

Consider the role of ESG in your M&A strategy

Due diligence is a key part to making smart M&A transactions. How does the deal help your business? How will the organizations involved in the deal fit together? What are the risks? This assessment of strengths and weaknesses is just as important when evaluating M&A targets that could bolster or weaken your ESG efforts. You’ll want to know about financials, the strength of the target company’s management team, the quality of its intellectual property (IP) and its IT systems. One thing that makes ESG-related deal due diligence different is the non-financial components that need to be considered. How do ESG strategies of each company mesh together?

ESG is taking greater prominence in M&A considerations as more companies realize the value it creates, if managed effectively. It’s another metric to look at for potential fit when evaluating M&A targets in the market.

Integrate ESG plans with talent acquisition

When it comes to acquiring talent to help execute your ESG strategy, it’s important to define your priorities. Do you prefer to hire someone who knows your industry? Or are you looking for an individual who knows how to implement ESG strategy and is more industry agnostic? It’s often difficult to find someone who is highly skilled in both areas.

Many companies are finding talent from within to fill key roles. It may be somebody who has been with the business for a while but is looking for a new challenge. Perhaps they have a passion for ESG-related work. Most likely, you’ll want a combination of internal and external support to make things happen.

Hiring strategy should also be informed by the direction of the company’s ESG focus. You may need more engineers for the E, more HR people for the S, and so on. Effectively filling your organization’s ESG talent gaps begins with aligning to your company’s strategy and areas of need.

Assess and take credit for ESG work already done

The roots of environmental, social and governance (ESG) can be traced back to 2004. Kofi Annan, then Secretary-General of the United Nations (UN), called on major financial institutions to collaborate with the UN and the International Finance Corporation to identify ways to integrate ESG concerns into capital markets. The resulting 2005 study, “Who Cares Wins,” marked the first use of the term ESG, stating that incorporating ESG drivers into investments would not only benefit the company, but would also make good business sense.¹

The point here is that ESG has been around longer than you think. It’s possible that steps already taken by your organization align well with your ESG aspirations. Take inventory of what’s been done and put those accomplishments into the appropriate bucket, whether that’s E, S or G. For example, the steady rise in green building certifications across your building portfolios has resulted in higher valuations and operational savings. Perhaps diversity among your executive team and board and employee ranks has increased.  Often, we get so busy putting out the day-to-day fires that we forget to fully measure the implications of actions taken to improve our business.

Meet with business unit leaders from across the organization to find out what they’ve done in terms of ESG. This could be your portfolio and asset management team, HR or the person who leads employee health and safety programs. Don’t let good work go unnoticed. As you develop an ESG framework, build it into your operating budget and hire people with an ESG mindset, it should become easier to keep these initiatives and programs top of mind so they can be reported in a timely manner.

Align ESG strategy with ERM

Your ESG risk mapping should be an integral part of your enterprise risk management (ERM) strategy. Let’s say you have concerns about your company’s diversity, equity and inclusion (DE&I) practices. You’ve talked about informally, but you’ve yet to really develop a clear and cohesive strategy to adhere to the current ESG guidelines. Matters such as DE&I need to be viewed through the same ERM lens that any other risk would be looked at in your organization. What’s the risk? What are the things we can do in response to address the issue and mitigate the risk?

Another aspect of this process is understanding that risks sit at different levels of importance. While DE&I is a risk that matters a great deal to your team and to your various stakeholders, there are likely other risks that aren’t as critical. Which risks are you willing to live with, which ones are you not and how do those ties into ESG? Some risks will be more manageable than others. When you align ESG and ERM, it enables you to evolve your ESG strategy to be more mature and transparent.

Build a data collection and analysis strategy

As with most things in today’s world, data will likely inform much of your decision-making around ESG. Building a data collection and analysis strategy is gaining clarity on the whole population of ESG data you’ll need to collect, whether it’s climate-related, social initiatives or any other components that align with your company’s ESG goals. This strategy should bring focus to your efforts, ensuring that you’re doing what’s needed, and not overextending into areas that don’t need to be analyzed. If you’re a home builder, there is less of a priority on how far employees drive to and from work because that will fall under your Scope 3 emissions. Data that would matter includes sourcing of materials, due diligence on suppliers and trade partners and whether they are able to provide you with their ESG data.

Much of this data will feed into your ESG reporting, which gets to the next piece of this step. Data will come in many different forms, from invoices and spreadsheets to PDFs and paper files. Some will be very sophisticated; other data will not be so deep. How you ingest all this data in its different sources and formats and synthesize it so you can understand what it’s telling you will go a long way toward shaping the quality of your ESG story.

Define key performance indicators

Along the lines of selecting the right data points to collect and analyze in your ESG strategy, you need to identify the right ESG metrics that will demonstrate whether you are meeting your goals. You can’t, nor should you try to measure everything. Each organization will have a different set of key performance indicators (KPIs) that best represent that company and its strategic plan. You should also think of KPIs from a storytelling perspective. Which metrics are most meaningful and best convey the broader ESG strategy that your company is executing against? How do these measurements impact your bottom line? How do they eliminate risk? The ability to quantify your accomplishments will help you stay on track to meet or exceed your goals and goes a long way in building trust and credibility in the marketplace.

There’s an old expression that you can’t manage what you don’t measure. The key is selecting the right metrics and KPIs to track and then being vigilant about monitoring the data and using it to continuously inform your ESG strategy. Establish baseline metrics so you have a starting point and can measure progress, or lack thereof toward your goals. Don’t set goals that are too high, and thus unrealistic to achieve. At the same time, be willing to be bold and stretch yourself to go beyond what you thought you could do, when it makes sense. It’s a balance that is different for everyone.

Measure your return on investment (ROI)

Like any investment, ESG must have proven value and an acceptable rate of return to help it remain viable. Additionally, like other investments, achieving positive ROI cannot just be a one-year strategy. Business, regulatory and stakeholder demands evolve over time and your ESG goals, KPIs and resulting ROI will also need to shift and realign along the way. Both tangible and intangible benefits must be considered as they relate to ROI. As you meet your goals, consistently ask, What’s next? What can we do now?

As an example of ESG ROI, a recent hypothetical case study of two 500,000 square foot office buildings in Chicago structured with triple net leases were examined—one a Class A “green” building and the other a Class B “non-green” building. EY professionals looked at key assumptions used in the income approach to highlight areas where ESG has an impact on property value. The EY study’s green building yielded between a 10% and 21% increase in market value compared to the non-green building.

Both tangible ROI, such as property value or avoidance of carbon tax penalties, and intangible ROI, such as reputational risk mitigation, should be considered.

Build a strong, clear messaging strategy

Most companies will find they have plenty of material from which to develop a compelling narrative about what their teams are doing to meet sustainability and ESG objectives. The challenge is taking all the data, anecdotes and experiences from across the organization and crafting stories that will resonate with key stakeholders. It’s a significant step, a way to get all the work that’s been done on the record so everyone can see what’s happening in the organization. A leading practice is to create one location where communications, marketing and PR teams can retrieve what they need to build the content.

Just as importantly, you need to know your audience. For most organizations, it’s a mix of stakeholders that include employees, customers, regulators, lenders, and publications that rank companies in your industry, just to name a few. While the basic components of the message will be similar, each group will also have unique interests that differ from what others care about. Employees may want to know about health benefits, wellbeing initiatives, and efforts to promote diversity equity and inclusion (DE&I). Customers may be interested in what your company is doing to mitigate its carbon footprint. Those in the community want to see how you’re making a positive impact, whether that’s through taxes or employee participation in charitable causes. Investors will take a broader, more holistic view and evaluate how what you’re doing affects the value of the business.

Targeted messaging that connects with stakeholders and speaks to their interests should boost awareness and contribute to the narrative that tells your ESG story.

Make sure that compliance professionals have a seat at the table when communicating ESG initiatives to the marketplace

As a company navigates its sustainability and ESG strategy, it’s imperative to have a credible group of people who can evaluate the work being done and offer their perspective. This layer of oversight minimizes the chance of something being missed, inadvertently misrepresented, or out of compliance with relevant regulatory guidelines. This team, ideally cross-functional in nature and led by an executive sponsor, will be able to examine issues of human capital, investor relations, marketing and administration. They can consider your ESG strategy and approach from a relevancy standpoint and offer their opinion about what matters and what doesn’t to a particular group, while also measuring the organization’s performance against goals and objectives.

In any effort, whether it’s within a business, an organization or even at an individual level, it’s helpful to have a second set of eyes to look at what’s being done. These opinions may not always need to be followed but having that compliance process in place is a form of checks and balances builds trust amongst your stakeholders.