The issue of climate change has long been a hot button topic across both sides of the political divide in the United States. Until fairly recently however, ESG had broadly managed to stay out of the same firing line. But over the past year, the investment community has been accused of enacting political goals via economic means. The complaint is that by withholding capital from businesses that fail to comply with particular ESG practices, investors are using economic power to implement business standards beyond those required by law.
The result is that a number of states – particularly those dependent on the extractive industry – have started to introduce so-called ‘anti-ESG laws’, aimed at curbing the use of environmental, social, and governance factors in making investment and business decisions. The proponents of these laws, which include states like Kentucky, Ohio, and Missouri, claim that they are trying to protect businesses that fail to comply with certain ESG demands, from being boycotted and ‘destroyed’. With language like that, it’s clear ESG has become a highly emotive topic.
So much so in fact, that things have even spilled over into Congress. Recently, Chairman of the House Financial Services Subcommittee on Oversight and Investigations, Congressman Bill Huizenga (R-MI), sent letters to asset managers at BlackRock, Vanguard, State Street, J.P. Morgan Chase, T. Rowe Price, Prudential, Goldman Sachs, Fidelity, Capital Group Companies, and the Bank of New York Mellon.
In those communications, Huizenga argues that “companies who leverage their voting power to strategically vote on shareholder proposals with the intention of driving social and environmental policy change deviates from the primary focus of maximizing investor returns. Congress must understand how asset managers fulfill their fiduciary responsibilities to prioritize financial returns and act in the shareholder’s best interest.”
His point? Asset managers are there to make money for shareholders, not to enact political agendas.
For businesses themselves, the politicization of ESG has created something of a bind. Firms find themselves caught between seeking to comply with investor demands and navigating a growing patchwork of statutes that seek to limit the use of ESG factors in business decisions. With new regulations frequently introduced mandating ESG targets or guarding against mandates, it’s a complex landscape.
As the world’s most widely adopted ESG data platform for real estate, many of our clients use Measurabl’s technology to measure their performance against particular regulations and investor demands. So, we clearly stand behind ESG as important for business reasons – and publish an annual report on our own ESG efforts.
Die meisten Measurabl’s focus is on the “Environmental” – or “E” – in ESG. But let’s first look at the other two elements.
Governance – the “G” in ESG – remains an uncontroversial method of ensuring all risks which can impair the economic livelihood of companies are appropriately managed. Having a board of directors that regularly assess these risks protects shareholder value.
An asset’s success and community welfare are increasingly connected. An awareness of that social impact – the “S” in ESG – is vital for real estate strategy. For instance, investments that don’t adhere to fair housing regulations put a company’s brand and finances at risk. And on the positive side, making an investment can help turn around a community, increasing an asset’s value. That’s a long-standing social component of the underwriting process.
Of course, real estate owners and asset managers stand to gain much from improving their environmental performance (the “E” in ESG), regardless of regulatory or investment pressure. Aside from being the right thing to do, making changes to reduce the energy consumption of a building results in substantially reduced operating costs.
Investors are also not the only community concerned with the environmental credentials of a building. As the tenant community becomes more discerning, sustainable buildings are much more likely to win the occupier war. With vacancy rates remaining stubbornly high across commercial buildings in the U.S., demonstrating a commitment to sustainability might just be the difference between winning and losing tenants. Of course, higher occupancy also means a better building valuation.
Put simply, we believe that the dichotomy between ESG legislation state-by-state should have little bearing on companies’ ESG strategies. Firms don’t need regulation (or lack thereof) to understand that they are better served by improving their environmental performance, whether there is external reward for doing so or not. The social and governance aspects of ESG are also crucial to protecting investments’ value.
Real estate companies should be setting and working towards ambitious targets themselves, recognizing that the moral, reputational, and yes, financial, rewards are there for the taking if they do so, regardless of any political affiliation.