Colliers leaders in Capital Markets recently sat down with Colliers’ Jeff Gerwig, National Director, Engineering and ESG Strategy, and Giselle Gagnon, Vice President, National Services | REMS Canada, to get their take on how ESG is playing into commercial real estate strategy and performance. Below are takeaways from our conversation.
Colliers Capital Markets (CCM): Can you help define what ESG means/is?
Jeff Gerwig (JG): ESG is an acronym for Environmental, Social, and Governance. It’s a foundation for sustainable business practices that focus on good corporate behaviors and activities with employees, communities, investors, and the planet. It encompasses a broad range of topics, and an organization’s score will help investors identify resilient businesses and their impact on the world.
Giselle Gagnon (GG): “E” encompasses carbon emissions and climate change. “S” includes labor relations, philanthropy, and diversity and inclusion. “G” is the internal systems of practices, controls, and procedures a company adopts to govern itself. “G” is the “talk” metric — what you say you will do. “S” and “G” together are the “walk” metrics — what actions you are taking.
CCM: Why are companies focused on ESG?
JG: Investors are pushing corporations to disclose ESG initiatives, as high ESG scores correlate with a lower cost of capital, less volatile earnings, and ultimately, lower market risk.
CCM: Are owners/investors focused on any one of those letters more than another?
JG: “E” and “S,” or planet and people, tend to be more of a focus for owners. Carbon footprint, waste diversion, and diversity and inclusion are the topics owners reviewed most. Capital sources view the E, S and G as equally vital: “G” ensures accurate and transparent financials, which are important to an investor’s long-term performance advantages.
CCM: Should those focuses be changing?
JG: I don’t feel ESG focuses should change, but I do believe ESG practices will continue to evolve. We are still educating on ESG and the wide range of ESG initiatives, and I suspect that once more companies see ESG scores, they will focus on each letter.
CCM: What are the biggest struggles with ESG?
JG: Companies struggle to identify what ESG initiatives they should focus on. Many organizations are now re-evaluating what’s important to employees, clients, communities, and other external stakeholders, and that takes time and money to accomplish.
CCM: Do you see differences between regions or asset types?
JG: We see differences on environmental initiatives by asset type. An office building, for example, will have utility data and waste tracking, and we can use that information to improve performance. A triple-net industrial asset often has a tenant managing this data, and it’s harder to improve performance without visibility or control of data.
GG: From a regional perspective, the way electricity is generated has an impact on a property’s or investors’ ESG policy. Think the difference between coal-powered electricity and clean/renewable energy. This is one of many factors in the decision-making process, but it is starting to be an input.
CCM: Are landlords and occupiers taking the same approach to ESG? Are there differences?
JG: Yes, we see both landlords and occupiers making significant changes to their businesses. On the landlord front, we mostly see large institutional clients who are paving the way with large ESG initiatives. Most landlords with smaller portfolios are still operating in the same way or just beginning ESG discussions and research.
CCM: Does an ESG strategy result in better performance, either via investment or asset management?
JG: It does, yes. On the asset-value side, savings through energy efficiency result in increased NOI and asset value. For example, for every $10,000 saved through energy efficiency, stats have shown that asset values increase by more than $150,000, assuming a 6.5% cap rate. Better assets that incorporate ESG should see increased tenant retention, reduction in lost rents, and lower vacancy. From an operations standpoint, figures show that ESG can lead to an 8.5% reduction in operating costs, 6.8% increase in building values, 9.2% increase in ROI, and 6.4% increased occupancy.
CCM: What do you see as the next opportunities?
JG: Part of the evolution of ESG will be organizational resilience — meaning they can adapt better to climate change and have practices in place to respond to unforeseen events like national disasters. In fact, we are already seeing ESGR being used in some cases, and the “R” stands for resilience.
GG: At a micro level, smart buildings and innovative technologies such as IOT-based devices continue to change and converge. Technologies once thought to be available only in new buildings are making headway in existing assets.