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www.globest.com/realestateforuming increasingly important to investors—not just becausethey want to ‘do good’ but also because they want to dowell with their bottom line.
There is a growing body of research that supports thisbelief. Quantitative equity strategists at BofA GlobalResearch, for instance, found that companies scoringhighly for ESG practices did better than those in their sectors that scored poorly. Namely, US companies with high(top quintile) ESG rankings in the S&P 500 index haveoutperformed their counterparts with lower (bottom quintile) ESG rankings by at least 3% every year for the past fiveyears. The report also pointed out that in the US ESG metrics are the best measure for signaling future earningsrisk—superior even to financial risk factors, like the levelof a company’s leverage.
In a separate study released at the beginning of the year,
ISS ESG, the responsible investment arm of Institutional
Shareholder Services, also found that there is a link between
ESG and financial performance and delved into the reason
why. “While one can argue that the relationship between
ESG and financial performance is perhaps due to the fact
that more profitable firms have the resources to invest in
areas that positively influence ESG, it could also be that prof-
If it is a little bit of both, then this means that good-ESG
initiatives drive up financial performance, which then pro-
vides the monetary resources to invest to be an even better-
ESG firm, which then drives up performance again, and so
on, ISS ESG said. “People may choose not to invest in a
firm that has poor ESG, thereby limiting its access to capi-
tal and raising its cost of capital. Firms that get in trouble
on the environment may be distracted by the regulatory
headache (higher costs) and customers may avoid the firm
(lowering revenue). If one does not treat employees right,
this could lower morale, increase turnover, and therefore
Mindful of these and other findings, institutional inves-
tors have been embracing ESG as an investment strategy.
Norway’s $1 trillion wealth fund, for example, is excluding
four companies for their vast emissions of greenhouse
gases, or at least putting them on probation to force them
to change, according to statements the chairman of its eth-
ics watchdog made to reporters.
To name another example, in January of this yearBlackRock announced it had joined Climate Action 100+,a group that pressures companies to act on climate change.Launched in 2017, Climate Action 100+ counts more than370 institutional investors as members.
In another interesting development, at the start of thisyear Fitch Ratings announced the launch of a new integrated scoring system that shows how ESG factors impactindividual credit rating decisions.
“Our focus is purely on fundamental credit analysis and so
our ESG Relevance Scores are solely aimed at addressing ESG
in that context,” Andrew Steel, global head of Sustainable
Finance at Fitch Ratings, said at the time. “The scores do not
make value judgements on whether an entity engages in good
or bad ESG practices, but draw out which E, S, and G risk ele-
ments are influencing the credit rating decision.”
In a separate report, Fitch Ratings noted that 67% of
banks screen their loan portfolios for ESG risks when lend-
ing to corporate borrowers.
Ultimately, though, results are what truly resonate andinvestors are reporting the ESG does indeed work. TerrellGates, CEO of Virtus Real Estate Capital, embraces ESG asan investor because these income streams are more resilient. The company focuses on healthcare, education andworkforce housing and the ‘S’ piece has been particularlykey to its investment philosophy, he says.
“We benefit all stakeholders with this approach—theresidents in communities, the broader city and our owninvestors with attractive risk adjusted returns.”
What ESG Looks Like In CRE
As investors make their demands clear, CRE has followed
suit adopting ESG in their own operations. In many cases,
this was not at the prodding of institutional capital—the
commercial real estate industry has known for a long time
that environmental-friendly buildings perform better.
More recently they have been focusing on the govern-
ance and social pieces of the equation.
“This is a topic of increasing importance to REITs and
CRE companies,” Jones says. “There has been an exponen-
tial growth in the issuance of ESG reports, for instance.”
Indeed, there are a multitude of ESG strategies available
to companies, says Uma Pattarkine, investment strategy
analyst from Centersquare.
Strategies focused on employees include diversity andinclusion, a large umbrella that considers not only thediversity of the workforce across various management levels, but also considers any compensation gap that might