During Nareit’s Earth Day webinar, ESG Investing and REITs: What to Know in 2022, panelists discussed the REIT industry’s progress with ESG reporting and initiatives, opportunities for REITs in the coming years, and the evolution of ESG investing.
Nareit Senior Vice President of ESG issues Fulya Kocak moderated the conversation between Laura Craft, head of global strategy and investment ESG at Heitman, and Brendan McCarthy, vice president at Calvert Research and Management.
Kocak began by sharing key takeaways from Nareit’s fifth-annual REIT ESG Dashboard. In 2021, all 100 of the largest U.S. REITs by equity market capitalization reported publicly on their ESG efforts. Even smaller REITs are normalizing ESG reporting, with the percentage of REITs with an equity market capitalization under $5 billion that report on ESG efforts publicly jumping from 41% in 2017 to 98% in 2021.
Craft noted that the areas of focus within ESG have shifted over the last five years. While the “E” was mostly defined as green buildings five years ago, today the conversation has turned to carbon footprint and physical risk within a portfolio.
McCarthy added that five years ago there was a wide variety in disclosures but today there’s a new focus on both quantitative metrics (i.e., greenhouse gases or energy efficiency) and qualitative metrics (i.e., management of human capital). All of these play into what’s most important from an investor’s perspective according to McCarthy: direct financial performance.
Looking ahead at what’s to come with REITs and ESG reporting, Craft predicted there will be greater standardization. “I think we’re going to get to a place where we can more easily compare companies on the E and the S, and they’re going to be more important to how we’re thinking about our investments and how we’re doing our due diligence and thinking about where we place capital,” Craft said.
McCarthy agreed, noting that standardization is going to help drive transparency in the industry. Turning to climate risk and resiliency, he said he hopes in the future, “REITs don't have to take on this entire burden of building resiliency, but I encourage them to get together and engage with municipalities to build up the infrastructure.”
When it comes to the role of net zero targets in his investment decisions, McCarthy said that it can be challenging for an investor when companies set ad hoc targets. “I encourage REITs and all real estate owners to adopt science-based targets. It is a rigorous third-party standard that allows for comparability across all peers,” he said.
In the past two or three years, there’s been a big increase in companies setting net zero goals. “I think it's important to have a goal, but I do like to see the pathway, the action steps, and how they're progressing towards it,” she added.
To wrap up the session, Kocak asked each panelist to share action items REITs and real estate companies should take in the coming years to set them up for success.
McCarthy encouraged REITs to look at Nareit resources such as the Practical Reference for ESG Implementation and Reporting (PDF) and the Guide to ESG Reporting Frameworks (PDF). He also suggested companies establish at least one point person for ESG. Finally, he noted that, “ESG is a journey, there is no perfect ESG company out there.”
Craft said there is going to be an increasing focus on social factors such as human capital and diversity, equity, and inclusion. “The global financial crisis gave rise to the environmental metrics. And I think COVID helped give rise to the social factors,” she said.
She strongly encouraged REITs to include ESG disclosures and how ESG is material to their investment making decision processes in the methodology section in their prospectus.