ESG in commercial real estate faces metrics scrutiny – Trade Observer

If you expect the criticism spawned by ESG investing to stop it, you have something else to come, especially in commercial real estate.

“ESG is not going away,” said Peter Miskovich, executive managing director and head of strategy and innovation consulting at JLL, one of the world’s largest real estate services firms. “As a company, we are very committed to ESG principles in terms of real estate investments, as well as long-term ESG leading practices for our corporate clients.”

Regulators around the world came up with the same idea around the same time. That is to say that ESG – which stands for environmental, social and corporate governance, and means that companies are called upon to pursue ever more progressive and socially responsible policies for the highest possible score – does not rest on any universally accepted principle. Securities agencies around the world, including the U.S. Securities and Exchange Commission and the International Sustainability Standards Board, have launched efforts to develop guidelines that ratings agencies and others who monitor companies’ ESG efforts companies can use to help investors feel more confident that a high rating actually means something.

Meanwhile, the more than 20-year push to get companies to adopt climate-positive practices, eliminate pollution, and seek a more diverse and less damaging workforce and management staff has sparked criticism from left and right, a particularly decisive prospect with the right expected to score victories in this fall’s midterm elections.

Former Vice President Mike Pence, a Republican nominee for the GOP nominees, said he wants to “control” ESG investing, that energy companies being overly concerned with such efforts “allow left-wing radicals to destroy domestic energy producers”. according to a New York Times may article. Billionaire investors Peter Thiel and Bill Ackman have urged companies to move away from environmental, social and political issues.

The Heritage Foundation and the National exama think tank and a right-wing publication, respectively, have published articles pointing out that too much devotion to “waking up” forces companies to deviate from economist Milton Friedman’s tenet that the sole purpose of a business is to legally pursue profit.

Last month, Utah leaders, including Governor Spencer Cox, co-wrote a letter to Standard & Poor’s Global, one of the ratings firms rating ESG efforts, calling such efforts “counterproductive, misleading, potentially harmful to rated entities, and possibly illegal” and castigating “unreliability and inherently political nature of ESG”.

On the political left, there are articles like a New Republic story in october declaring that “climate-friendly investment funds are a scam” and comparing the push for ESG to former Vice President Al Gore’s plea for “sustainable capitalism”, in which greed and the good, two opposing goals, are meant to work together when they really don’t. ‘t.

Sometimes ESG ratings are based on the idea that being environmentally or socially progressive better protects a company from lawsuits and regulatory repression and is therefore good for the bottom line. Others believe that such policies could attract more capital from investors or funds that want to support forward-looking companies.

There is a lot of money at stake. An analysis from Bloomberg in early 2021 predicted that approximately $1 trillion would be raised by these investment funds over the next five years.

For commercial real estate, there are two main objectives: the first is that companies are themselves seen as environmentally and socially progressive, that they operate buildings that are carbon neutral or better, and that their management and their core staff are beyond reproach. . The other should be considered renting to tenants who share these goals.

Government regulators, being government regulators, cannot simply impose standards as if they were flipping a switch. They must submit proposals, wait for public and stakeholder feedback, heed that feedback, issue revised standards, wait for politicians in an increasingly polarized Congress to intervene, see if lawmakers want to intervene, and then, and only then, can regulators issue rules. which have the force of law. Perhaps.

The SEC is setting standards for climate-related disclosures to investors. The rules would normally go into effect after a final committee vote, but the 60-day comment period that began in March has been extended until June 17, according to an SEC spokeswoman.. The rules would require public companies to publish periodic reports on climate control efforts, including those that “are reasonably likely to have a significant impact” on their finances.

“Our 1930s core market is for investors to decide what risks to take, as long as public companies provide full and fair disclosure,” SEC Chairman Gary Gensler said in a statement on the initiative.

On May 25, the SEC voted to toughen ESG rules, which are still subject to public scrutiny before they go into effect, according to a story in the the wall street journal. One measure would require greater scrutiny of the names of funds that promise an ESG orientation, the other would increase disclosure requirements for those funds.

In other regulatory initiatives, members of Congress have stepped in and imposed measures that halt the regulatory process and/or nullify the proposals. Nothing of that nature has yet happened in this particular case.

It is not just companies whose actions have a direct impact on the environment, whether through physical or social interactions. Banks and insurers, which in financing, lending and insuring such actions play a critical role, are also under pressure to examine their impacts, Fitch Ratings analysts wrote in an April report. Like S&P, Fitch is a non-governmental rating agency that also rates companies’ ESG efforts.

Change in this area can take the form of “stress tests”, similar to those imposed on financial institutions following the financial crisis of the late 2000s, to see what companies need to do to reduce their climate impacts. and how much they will cost. In addition to the SEC and the International Sustainability Standards Board, the European Union participates in these efforts, as do countries such as Brazil, Australia, Canada, Singapore, Malaysia and the United Kingdom.

There is “widespread movement toward alignment,” Fitch analyst Marina Petroleka said in the report. “By the end of the year, we will have a clearer picture of the future ESG disclosure landscape, with 2023 being a key year for the start of implementation.

Asked what would happen if Congress moved to Republican control, Petroleka told Commercial Observer “it remains to be seen” whether the midterm election thwarts the SEC’s ambition to get the rules in place by the end of the year. “The SEC prepared for the final proposal to face legal challenges, which has been a risk on the horizon for implementation from the start,” she said.

Billy Grayson, Executive Vice President Centers and Initiatives at The Urban Land Institute, a Washington, D.C.-based real estate industry think tank, said real estate has a huge interest in how those efforts are unfolding.

“There’s an enormous amount of value at stake for real estate,” Grayson said. “There is some level of third-party assurance that reporting is done effectively, but it falls far short of the audit quality of financial reporting that we expect today. And, as regulation progresses, ESG data and reporting will need to look much more like financial reporting.

In April, ULI published an article on its website generally supporting global efforts to regulate greenhouse gas emissions, but warned that “compliance could get complicated”. The article is broken down the ways to regulate this area could become messy.

Those efforts will continue regardless of what happens in the midterm elections, including whether the GOP takes control of Washington early next year, Grayson said.

“Right now it’s investors, tenants and regulators,” he said. “If people who did not believe in the regulation of this takeover, investors and tenants will continue to drive it. If your cost of capital or your access to capital and your ability to attract tenants depends on a certain level of ESG performance, real estate will still have to navigate this landscape.

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