Fair trade coffee beans and office carpets made of natural fibre may seem to have little in common. Yet both are borne from the pursuit of ethical and environmentally friendly business practices which has made Environmental Social and Governance (ESG) a hot topic for companies and investors worldwide.
ESG is the framework used to evaluate a company’s impact across the three metrics. Interchangeable with the term ‘ethical investing’, ESG’s impact on investment decisions as well as valuations is fuelling its growing importance.
As for exactly what ESG encompasses, the scope is broad. Its roots lie in responsible investing, the concept springing from initial reluctance of investors to engage with any industry or business perceived to negatively impact society or the environment – those that, for instance, are seen to destroy fragile eco-systems, pollute the environment or exploit workers in pursuit of financial gain.
Nowadays ESG can be applied across a myriad of social and environmental factors – from the source of a coffee company’s beans, to how well that company treats its employees, to whether the bean processing plant is fitted with solar panels, LEDs and a system to harvest and reuse rainwater. The bottom line is that consumers increasingly care about sustainability and investing in entities whose actions benefit society is allowing them to align their investment decisions with these values.
While this factor has made ESG critical to all markets, analysts say it is especially pertinent for industrial and logistics (I&L), the star performer of the past 18 months attracting most attention from investors. CBRE research shows growth in I&L assets has consistently outpaced those of office and retail assets since the start of the pandemic, while the sector’s rents were the first to normalize, returning to pre-COVID levels as early as July last year. Driving I&L’s growth is the significant shift by consumers to online shopping and home delivery that has sent demand for product warehousing and distribution facilities through the roof.
Cutting the carbon
For I&L commercial property owners the time has arrived to ‘review the sustainability credentials’ of their bricks and mortar, according to analysts. CBRE’s director of industrial property management Paul Kernan said the spotlight on carbon footprints, emissions and more is only growing brighter leading to investors increasingly turning away from non-environmentally friendly assets and prioritising environmental friendly assets.
“We are accelerating towards a low carbon economy and society,” Mr Kernan said. “This means it is critical for commercial buildings to be designed and constructed with low embodied carbon and have the capability to operate as net-carbon-zero or net-carbon-positive.
“Low and zero carbon buildings are the only choice for investors who don’t want to be left with stranded assets and the associated financial and reputational damage associated with such liabilities.”
Understandably, smaller operators of single sites or modest portfolios may question the ROI should they race to install the latest in sustainable architecture. Yet Mr Kernan maintains that green building projects can be carried out in such a way that costs are paid back “many times over in the short, medium and long term of the investment”.
Ease of being green
With this in mind, Mr Kernan has listed a number of key future-proofing features I&L landlords and owners of other commercial property types should consider. The features not only serve to meet ESG expectations but will also help lower operating costs and potentially result in more favourable valuations:
- LED lighting, rainwater harvesting, rainwater reuse, and end of trip facilities. “These are considered standard,” Mr Kernan said.
- Rooftop solar is almost a given nowadays, and I&L sites are ideally placed for solar PV installation Mr Kernan said. Aside from directly leading to improved valuation potential, Mr Kernan said rooftop solar also reduces emissions and therefore energy bills. I&L sites offer excellent opportunities for solar PV installation. “With more corporate organisations striving towards net zero emissions targets, onsite solar generation provides a commercial opportunity to secure ESG focused tenants,” he said.
- Consider material waste recycling during demolition and reusing derelict building material during construction in order to reduce the amount of waste sent to landfill, Mr Kernan suggests. “Operational waste on site should also be carefully managed through dedicated receptacles for various recycling streams such as worm farms for organic waste and even setting zero waste to landfill targets,” he said.
- Changing modes of transport means greater importance now exists to “provide adequate amenity on site to suit tenants’ needs” Mr Kernan said. “This may include secure bike/e-scooter storage on site, car parking prioritised for fuel-efficient vehicles, and EV charge stations.”
- Comfortable tenants also make for attractive assets. “Smart lighting, better thermal comfort and enhanced indoor air quality are three crucial aspects of improving occupant health, wellbeing and productivity,” Mr Kernan said. “Benefits can be realised in the attraction and retention of tenants, as well as the attraction and retention of talent for those tenants – benefiting the bottom line for both building owners and tenants.”
The big picture
On a macro level, ESG’s momentum does not appear it will wane any time soon. The Responsible Investment Association Australasia (RIAA) is Australia and New Zealand’s largest network of ethical investors, about 350 in total including banks fund managers and trusts, collectively managing over $9 trillion. The association’s figures reveal a substantial shift toward ethical or ‘impact’ investing: professionally managed responsible investments in Australia in 2018 totalled $980 billion. In just over two years, that figure has grown by almost 20 per cent to $1.15 trillion. Almost 40 per cent of all professionally managed investments are now managed using one or more responsible investment approaches, according to the RIAA.
Big business is also indicating institutions with favourable ESG will fare better in the future. Some of the most telling announcements came last year from such major entities as The Bank of America Corporation and investment behemoth Blackrock, the former stating it anticipates ESG funds will grow to $20 trillion of assets and rival the S&P 500 within the next 20 years, while the latter stated intentions to dump holdings comprising assets seen to ignore climate change.