From our Thought Leader Contributor, EY.
A more strategic and holistic approach to environmental, social, and governance issues is helping to create long-term value for real estate organizations.
- An effective ESG strategy is built on an understanding of key internal and external stakeholder needs that are then prioritized by what will have the most material impact.
- Establishing measurable ESG performance outcomes and an organizational support structure that contributes to and governs ESG initiatives is critical to enabling ongoing progress.
- ESG-related reporting requirements, including the expected finalization of the Security and Exchange Commission’s proposed climate disclosure rule, the International Sustainability Standards Board’s exposure draft on sustainability-related disclosures, and public company reporting requirements already established by other rulemaking entities around the world are moving companies towards action.
Environmental, social and governance (ESG) efforts among many real estate companies have been focused on specific environmental initiatives and voluntary disclosures — but, in our experience, that almost always becomes a catalyst for rethinking strategic priorities, business processes, risks and opportunities.
Among leading companies, this more strategic “next-level” approach is being viewed as a business imperative to drive long-term value for all stakeholders, including employees, customers, shareholders and society at large. The following five questions are important to consider as your real estate organization takes a less reactionary and more strategic approach to ramping up its ESG efforts to remain resilient and competitive in the marketplace.
1. What internal and external forces are driving your real estate organization’s ESG needs?
Identify the internal and external stakeholders that are essential to your organization’s growth, risk mitigation and compliance efforts while being mindful of the various market and societal forces.
The 2021 EY Global Institutional Investor Survey found that investors are seeking financially material ESG data from companies.
2. What ESG issues are most material and require prioritized strategic investments by your real estate organization?
Conducting a foundational analysis will help identify ESG issues important to your internal and external stakeholders and reveal the most material issues to pursue.
Sample real estate company mapping and prioritization of key stakeholder issues are shown below. What are your organization’s most material issues?
Consider ESG disclosure guidance from entities such as the ones below to help identify appropriate metrics for your material issues
There are many standard setters and organizations who aim to drive ESG reporting via standard setting and various other frameworks. The below highlights a few of these organizations.
Standard setters: GRI and SASB
- Global Reporting Initiative (GRI). The first and most widely adopted global standards for sustainability reporting.
- Sustainability Accounting Standards Board (SASB) (since 2011). Sustainability accounting standards help companies disclose material, decision-relevant information to investors in a cost-effective way. There are industry-specific standards for 77 industries in 11 sectors.
International goals and guidance: UN SDGs and TCFD
- Sustainable Development Goals (SDGs). There are 17 goals supported by 169 targets developed by the United Nations.
- Task Force on Climate-related Financial Disclosures (TCFD). TCFD was established by the Financial Stability Board (FSB) in 2015 to promote more effective climate-related disclosures; it is focused on financial impacts of climate-related risks and opportunities of an organization.
Disclosure-based sustainability scores: Dow Jones Sustainability Index and CDP
- Dow Jones Sustainability Index (DJSI) represents the top 10% of the largest 2,500 companies (-300 companies); scores are developed from S&P Global’s Annual Corporate Sustainability Assessment (CSA).
- CDP (Formerly Carbon Disclosure Project) requests companies, cities, states and regions to provide data on their environmental performance though five questionnaires.
3. Has your real estate organization established measurable ESG performance outcomes?
The ability to track and measure your organization’s ongoing ESG performance, with the help of accurate and accessible data, is critical to enabling continuous improvement efforts that can be reported to your stakeholders.
Sample ESG goals and metrics are shown below. What are your organization’s long-term ESG goals and targets, and how will you measure success?
As stakeholder pressures and ESG-related regulations grow around the globe, a similar increase is likely in the number of organizations receiving independent third-party assurances to gain stakeholder trust and confidence on their tracking, measurement and reporting of ESG efforts.
REIT disclosures tied to environmental performance and social policies have consistently increased each year for the last three years.
Among REIT reporters:
- The majority offer environmental performance metrics.
- Most reference GRI or SASB standards.
- Greater emphasis has been placed on social disclosures.
REIT assets with environmental performance disclosure
Additional reporting trends:
- 65% of S&P 500 reporters responded to the CDP climate change questionnaire in 2019.
- 69% of Fortune 100 companies in 2019 offered sustainability commitment information in the proxy.
REIT disclosures of social policies
4. Does your real estate organization have an appropriate governance structure in place to pursue ESG goals and targets?
Activating your ESG plan requires a cross-functional workforce that supports your executive leaders and helps deliver your desired outcomes.
Embed ESG as part of all your real estate organization’s board committees to enhance cross-functional effectiveness and innovation:
- Corporate responsibility and sustainability committee
- Finance committee
- Executive committee
- Strategy and planning committee
- Compliance committee
- Risk committee
- Technology committee
- Public policy committee
- R&D committee
- Nominating and governance committee
5. Does your real estate organization understand how you are perceived in the marketplace?
Voluntary disclosures are only one of the multiple sources that rating agencies and similar entities use when reporting on a real estate organization’s ESG efforts. These outside ESG data sources and rating agencies will only grow over time. Understanding how your organization is perceived and rated across these multiple entities is a first step toward establishing an ESG narrative about your organization that is accurate and perceived in a positive light by your stakeholders.
Consider the growing number of third parties that are reporting on and rating your company’s ESG efforts. How can your organization’s ESG innovation efforts also help you improve the way third parties view your ESG performance in comparison to your competitors?
Spotlight on the EY ESG IQ solution
Improving ESG rating agency scores can be complex, confusing and time-consuming. The EY ESG IQ solution transforms disparate rating agency data on your company into a powerful analysis tool, enabling a quantitative approach to identifying viable ESG rating agency improvement opportunities.
Benefits and capabilities of ESG IQ
Guest Post by
Kyle Bolden, EY US-East Region Market Segment Leader – Real Estate, Hospitality & Construction Sector
Christopher M. Johnston, Americas REIT Leader and US West Region Assurance Leader – Real Estate, Hospitality & Construction
Article References
- “Edelman Trust Barometer 2020,” Edelman website, 2020 Edelman Trust Barometer Global Report, https://www.edelman.com/sites/g/files/aatuss191/files/2020-01/2020 Edelman Trust Barometer Global Report_LIVE.pdf, accessed 9 February 2021.
- 2020 proxy season What investors expect from the 2022 proxy season | EY – US, accessed 9 February 2021.
- Trends on the sustainability reporting practices of S&P 500 index companies. Governance and Accountability Institute, Inc. (2020).