The term “Environmental, Social, and Governance,” or ESG, has been around for two decades, first being coined by the United Nations Global Compact in 2004. The number of companies with ESG-related plans, job positions, and strategies exploded in recent years, driven by a growing acceptance of climate change impacts and the increasing popularity of green buildings. However, the rise of the framework has led to increasing political backlash, with some states outright banning ESG in investment decisions.
ESG is still very important in the real estate industry and a subject that many companies are eager to reframe to investors or project partners who may be wary of the term.
Rehabilitating perceptions of ESG was the topic of a recent panel discussion during New York City Climate Week, comprised of panelists Breana Wheeler, director of operations at BREEAM USA; Sonny Masero, managing director at Hines; Anica Landreneau, global director of sustainability at HOK; Graham Higgins, senior manager of energy and ESG at Nuveen Green Capital; and moderator Marta Schantz, co-director of the Randall Lewis Center for Sustainability at ULI.
Shifting rhetoric
The pushback against ESG around the country is not only leading to bans and a negative stigma around the concept, anti-ESG rhetoric is also leading some companies to take actions to avoid being accused of “greenwashing,” a term used to describe companies that overstate or exaggerate sustainability commitments. This can mean removing ESG information from company websites and in general, keeping quiet about sustainability goals, a move now dubbed “greenhushing.”
“It’s certainly a challenging environment,” said Nuveen Green’s Higgins, citing a recent PwC report which found that more than a third of the 520 directors at U.S. public companies surveyed agreed that ESG has become a “charged” term and is no longer valuable.
However, Higgins’ company, one of the nation’s leading providers of green financing, especially in the C-PACE loan market, is not seeing a pullback in interest, and is instead seeing more demand from investors and occupiers. “A lot of it is semantics, ultimately,” Higgins added. “You adapt and overcome.”
For real estate professionals looking to partner with investors on sustainable developments, confronting the ESG issue head on is becoming necessary. Masero of Hines cited one of his favorite recent quotes from an executive at what he described as one of the biggest investment managers in the world. “They’re going to investors and saying ‘We don’t care what you care about ESG but you have to let us care about ESG if you want to make money,” Masero said. “At the end of the day that’s what it comes down to, and I like the simplicity of that.”
Panelists agreed that despite the ESG backlash and the numerous headlines over the last several months that have described ESG as being a “dirty word,” the current negative connotation towards the concept will be temporary and investors still see ESG as a top priority. “I don’t see a retreat from action,” said HOK’s Landreneau. “I think the train’s left the station, stakeholders have drawn a line in the sand and said ‘this is what matters to us.”
New strategies
Many in the real estate industry see making the business case for ESG as one of the best ways to rework the narrative around the framework and bring clients on board for sustainably-minded projects. But according to the law firm Ropes & Gray, in a country where more than 60 anti-ESG bills have recently been introduced at the state level, it can be a tough case to sell. That’s why panelists emphasized the importance of using the right language depending on the context.
“You have to figure out where the value is and talk about that,” said HOK’s Landreneau. She shared a story of interviewing for a master plan project that entailed a developer seeking to add 15 million square feet (1,4 million sq m) to a 117-acre (114.5 ha) site. After the interview, the company told her they were not interested in sustainability. Landreneau pointed out how some basic efficiency could help cut the needed infrastructure in half, and the company immediately changed its tune. “They were perfectly happy to call it sustainability at the end of the day, but it’s not what they entered the conversation thinking they wanted,” she said of the company.
Texas, a state that has taken one of the toughest stances on ESG, is understandably seen as a challenging market for sustainable development. However, the state’s investment in clean energy may come as a surprise to some. “Texas is the largest investor of renewable energy in the country. That’s not because they want to save the world, it’s because it makes money,” Masero said.
According to Kroll Bond Rating Agency, in Florida, another state where anti-ESG legislation has passed, the state still invests close to $13 billion with the company.
“I can go and talk to an industrial real estate project anywhere in the country and say if we put solar on the roof and we put EV charging there for the trucks we’ll increase operating income by at least 15 percent, in some cases 40 to 50 percent,” Masero said. “That gets people’s attention—regardless of what they think about saving the planet.”
BREEAM’s Wheeler agreed that despite the anti-ESG rhetoric and evolving definitions around the concept, there is still upward momentum and an increase in companies looking to achieve green certifications.“The language is shifting, it’s not changing,” Wheeler said. “It was CSR, now it’s ESG, and it will be something else in ten years. But everybody’s pointing in the same direction now.”
