COVID-19 has proved to be the tipping point for many trends that were already emerging within the business community, and the growing focus on ESG performance is no exception. With an established track record in ESG matters, REITs are well-placed to continue to build on their existing achievements, as well as respond to shifting areas of focus within the parameters of ESG.
“Reflecting more deeply on ESG goals and how they can be more holistic has never been timelier,” says Daniele Horton, founder and president of Verdani Partners. “The very notion of resilience planning is evolving as the parallel threats of climate change, global health and inequality all converge, requiring new thinking, cooperation, and leadership to address new ESG priorities,” she adds.
Laura Craft, SVP, global strategy and investment ESG at Heitman, speaking during a Nareit webinar, on July 21 noted that, “if anything, ESG is going to become increasingly important post-COVID.”
Craft said she expects to see an increased focus on the ‘S’ portion of ESG. “S has been lower on the scale of importance,” she noted. Going forward, she said, there will be additional questions and emphasis on how REITs are focused on social impact, such as how they create healthy buildings for their occupants.
Uma Pattarkine, investment strategy analyst for CenterSquare Investment Management, says the coronavirus crisis “has tested our humanity, and everyone is paying close attention to how companies have worked with their employees and communities during this time.”
Pattarkine says COVID-19, as well as the significant unrest seen throughout the country, has put social issues at the forefront of the conversation.
“Investors who were curious about ESG before, particularly at the retail level, are becoming more aware of how their investments are impacting issues they care about. These sentiments will ultimately filter up through their retirement investment preferences—bringing ESG to the attention of institutional investors that are managing large pensions and 401k plans,” she says.
Extending the ESG Commitment
Horton believes the pandemic may prove to heighten pressure to strengthen ESG requirements that will improve emergency response and resilience, as well as building occupant health and wellbeing.
“The onset of the COVID-19 crisis has resulted in increased investor demand for ESG reporting and benchmarking to better manage risk, enhance returns, and generate positive impact during uncertain times,” she says. “The crisis has also exacerbated existing challenges such as social inequality, health and wellbeing, and climate change.”
Will Teichman, vice president of business operations at Kimco Realty Corp. (NYSE: KIM), speaking during the July 21 Nareit webinar, noted that the shopping center REIT is “no longer grasping for examples of ‘S’ that are meaningful to our business, they’re right in front of us and we’re working on them day in and day out.”
Carol Samaan, vice president—corporate counsel and ESG at Healthpeak Properties, Inc. (NYSE: PEAK), said she expects the pandemic to “sharpen the focus on certain areas.” She noted during the Nareit webinar that the health care REIT will be enhancing its focus on ‘S’, including more initiatives around racial diversity.
Ying Yu, senior vice president of ESG for Prologis, Inc. (NYSE: PLD), notes that the pandemic will intensify stakeholder focus on ESG and drive ESG to evolve in all areas.
“We view our response to the current COVID-19 challenges as a meaningful extension of our longstanding commitment to ESG,” she says. “For example, through our existing Space for Good program, we have offered unoccupied buildings for COVID-19 relief efforts to government agencies, hospitals, and relief organizations.”
Longer term, Teichman said he doesn’t see the pandemic dramatically affecting the focus on global issues like climate change.
“The fact that we’ve become more aware of social issues has not detracted attention from the ‘E’ issues in any way. I think if anything it’s part of us understanding that this stakeholder-driven approach to business is here to stay,” he said. Kimco is “very actively moving forward on energy climate programs as well, because we all recognize that’s one of the big macro issues in the ESG realm that we all need to continue to remain focused on,” he added.
Continued Emphasis on ESG
Katrina Rymill, vice president of investor relations at Equinix, Inc. (NASDAQ: EQIX) says that while 2020 is a unique year, with particular momentum on both the environmental and social side driven by the pandemic, the overall emphasis on ESG priorities has been building for multiple years.
For Equinix, its sustainability strategy is an integral part of how it meets the needs of customers to green their supply chains, attract the best talent who want to work for companies driven by purpose, and consistently maintain a high standard of business ethics throughout the company, she says.
Kimberly Pexton, vice president, sustainability at JBG SMITH (NYSE: JBGS), says the investment community has sent strong messages regarding the importance of addressing ESG, noting it’s no longer a “nice to have,” it’s a “must have,” and the biggest shareholders have developed specific evaluation factors around ESG.
“There is also a strong business case to be made,” she says. “Companies that are willing to be proactive and forward-thinking about ESG will ultimately benefit through reduced operating expenses, increased operating income, and better risk-adjusted returns for their investors.”
Quantifying the 'S'
Looking ahead, Horton believes the ‘S’ and ‘G’ of ESG will gain equal footing with environmental issues as health, safety, wellbeing, and social justice gain momentum during the convergence of crises faced today.
“Traditionally the environmental aspects of ESG have overshadowed the sustainability movement, but the ‘S’ and ‘G’ have never been more important as health becomes a top priority,” she says.
Alex Bernhardt, director in the Marsh & McLennan Advantage group, believes there will be a shift in focus onto ‘S’ issues in the months ahead. Historically, these haven’t been as easy to quantify, he says.
“On the ‘E’ side, climate has really dominated, and for the most part, that’s been much easier to tangibly measure and understand for investors,” he says. It’s harder to do that on the social side, he adds.
Pattarkine says that while many aspects of ESG are qualitative in nature, REITs have slowly started to understand how to assess them in a quantitative manner that can be more objective and integrated into the investment decision-making process.
“There are plenty of ways to put quantitative metrics to use when assessing a company’s work in the ‘S’ and ‘G’ pieces of the puzzle,” she says. Within ‘S,’ efforts and outcomes like workforce hiring, promotion, attrition and compensation through an inclusion and diversity lens can all be measured. Robustness of employee health and wellness, and donations provided to community organizations, for example, can also be tracked, she adds.
Watchful Eye of REIT Boards
During the pandemic, many REIT boards have been steadfast in watching out for their workers, given that investor groups are seeking greater disclosure on this front.
CenterSquare is seeing some boards implement regular reporting on many of these issues, including diversity and inclusion metrics in relation to hiring and compensation.
“Reporting and disclosures are how companies and management teams can be held accountable on promises and programs, so great adoption of tracking and sharing results will be key to demonstrating progress,” Pattarkine says.
Horton notes that diversity and inclusion should be a serious consideration for REIT boards and organizations.
“While approaches differ among REIT boards to the social aspects of ESG, REITs absolutely have a critical role as an employer, landlord, and community steward, and should help to pave the way for racial equity and better diversity and inclusion practices,” she says.
Read more from September/October issue of REIT magazine, available now in an interactive PDF.