The term ESG (Environment, Social and Governance) reflects the private sector’s increasing engagement with sustainability.
The term can be used interchangeably with others such as sustainable investing, socially responsible investing and recently impact investing. While the term has been used to ad nauseum and for many has become a dreaded box ticking exercise to fully capture its significance beyond climate change objectives and solar panels to ensure the ‘greenness’ in buildings, it is important to revisit the origins of ESG to freshen the concept and fully capture the nobility behind this worldwide phenomenon that is upon us.
The term originates from the 1987 UN Brundtland Report which defined sustainability as “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (UN 1987). The practice of ESG investing has its origins in the 1960s as ‘socially responsible investing (SRI)’, with investors excluding shares or entire industries from their portfolios based on business activities such as tobacco production or involvement in the South African apartheid regime.
This definition informs the 2015 UN Sustainable Development Goals which sought to marry the international community’s focus on poverty alleviation in developing economies with growing awareness of environment issues, climate change and inequality. The 17 Goals stress the 4 Pillars of sustainability – social, environment, economic and governance.
It is important to keep in mind that sustainability is not only about environmental challenges or indeed climate change. The general view is that the pandemic resulted a game changing shift in priorities with ESG going from being niche area to a conventional consideration for asset managers and companies seeking to demonstrate that they are responsibly managed. In international markets this is being driven both by investor interest and regulation.
In our local economy, we are yet to see legislature being the driver or an enforcer of ESG initiatives. One may ask what ought to be done in the absence of a regulatory response to the growing need for ESG to be considered as a business imperative and for business decisions to be viewed with an ESG lens? The simple answer to this is that in the fast-paced, agile and connected global community, investors and asset managers alike cannot wait for government structures to guide their actions in this regard. Policy and best practice ought to be transposed from UN structures, international bodies and codes adopted to meet our current environment (with realism) but also bold, daring and forward looking.
There is a call that cannot be ignored, and that call is for leadership in entities with vested interest. The current needs of our time require leaders who, at the risk of being simplistic, “care” and are willing to put arguments forward in financial terms and genuine vision for organisations to exist beyond their duration in office. This means costly investments and unpopularity. Professional bodies are equally required to take on the role of coordination to ensure that efforts are coordinated.
ESG in the context of real estate
In terms of real estate, the focus has been on the energy efficiency of buildings. This includes a move towards electric systems being powered by renewable energy as well as lighting upgrades and installing low carbon geotechnical systems and moving away from natural gas.
The emphasis is increasingly on embodied carbon in the future. Embodied carbon refers to the materials used in constructing, refurbishment as well as maintenance of a building. This is in contract to operational emissions (the energy attributed to the use of the building). A building’s life cycle carbon emissions are the sum of embodied carbon and operational emissions. Increasingly, a larger proportion of the carbon footprint in buildings is ascribable to embodied carbon. The whole value chain of construction warrants careful consideration in this regard.
What all this means for investors
The market is dynamic and constantly self-correcting. The implication here is that we will see brown discounts being applied in the valuation of buildings with higher carbon ratings and noncompliance having a detrimental effect on balance sheets. For investors with interest in real estate, this means carefully considering of existing stock with the view to assess its status quo and what upgrades are needed, as well as proactive measures for green sites to ensure forward looking compliance to codes (voluntary and non-voluntary alike).
In the labyrinth of acronyms, it is easy to get lost in the maze – which ones are we then to consider for transposing into our policies? Global voluntary codes include the Principles for Responsible Investing (PRI), the Global Report Initiative (GRI), The Carbon Disclosure Project (CDP) and Workforce Disclosure Initiative (WDI), amongst many others. Botswana notably is party to the Paris Agreement, a legally binding international treaty ratified by 190 countries. Its goal is to limit global average temperature rise to well below 2°C and to purse efforts to limit the temperature rise to 1.5°C above pre-industrial levels, phasing out fossil fuels by the end of the 21st Century.
Participating countries also agree to work towards becoming greenhouse gas emission-neutral or ‘net zero’ in the second half of the century. Despite these commitments, countries have been slow to introduce the legislation and guidance needed to decarbonise their economies. The reality however, is that whether motivated by a sense of altruism or prudence, the times dictate that business decisions be viewed with an ESG lens. Investors are therefore to put a first foot forward in crafting policy to guide their operations.
About Gadzani: MREAC, MBA, BSc Property Studies(UCT) and currently pursuing MRICS Charter and MSc in Real Estate Investment Finance Oxford Brookes University. Gadzani is Property Investment Analyst at Khumo PAM.