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E.S.G. We have all heard it by now. So many articles, reports, and conference speakers have talked about ESG ad nauseam that it has become synonymous with other buzzy words like “green” or “sustainable.” As much as I love the fact that the business world is being more thoughtful about the environmental and societal impacts of their operations, I think the meaning that we have given the term is inadequate for what it is supposed to encompass. The reason I say that is because there is a lost element of ESG, namely the G. The G stands for governance and it is, in my mind, what is missing for the “ESG movement” we are experiencing in many industries, including real estate.
I listened to a podcast recently that really changed the way I think about ESG. The episode is from Freakonomics Radio entitled Are E.S.G. Investors Actually Helping the Environment? In it the host interviews an economist that looks at exactly what companies are benefiting from the increased investment in sustainable companies thanks to the focus being placed on ESG in the investment world. What she found was that most of the “green” companies that qualified as ESG investments are generally service firms, banks, software, and insurance companies mostly. The “brown” companies that don’t qualify are all of the companies that produce goods like plastics, building materials, and food. The podcast then goes on to argue that if we really wanted to reduce the environmental impact of our businesses we should focus on the brown companies. They produce much more carbon and other pollutants than green companies and they are the ones that most need capital to help them invest in sustainable technology.
I agree with the argument that investing in “brown” companies can do more to help us reach our sustainability goals than pouring even more money into “green” companies that already don’t have much impact. But this theory only works if you ignore the G or ESG, which they admittedly do in the podcast. Sure, investing in Shell or Tyson Foods or Phillip Morris could help them be more sustainable, but only if your investment can help sway the company to do so. Generally, the governance of public companies is such that all but the largest investments does not create enough voting rights to change anything the leadership is doing. So investing in most dirty companies will only help them continue to be dirty.
I am not expecting companies to start to let all of their investors vote on their decisions, that would be crazy. But what I do think most companies need is a bit more openness about what they are actually working on sustainability. This pertains to real estate companies particularly. There are certainly a few real estate companies that have a very clear direction when it comes to social and environmental sustainability, but of all of the thousands of real estate companies in the country I can only think of a few. If more real estate firms were open about their struggles to be “green” and what they could do if they had more investment dollars, I think it would help make the industry clean up much faster than us patting the few companies on the back that happen to be lucky and well capitalized enough to invest in green tech.
The world is changing and both consumers and investors want to know that their money is going to sustainable businesses. We have already seen this in real estate. The problem is that this leaves out the other companies that own “brown” buildings and don’t have the resources to upgrade them. If we want to make our buildings more efficient and sustainable we can’t just focus on the showpiece new developments. We need to invest in the companies that own buildings that are not yet in compliance with our energy goals. But in order to do that we need to know that his investment will actually go towards sustainable upgrades. And that means either giving investors more say when it comes to a business’s day to day operations or having a clear, honest strategic direction. I think we are much more likely to see the second option, I just don’t know what it is going to take to get us there.
Overheard
Mapped
If you are wondering which countries are doing the best when it comes to investing in sustainability check out this interesting map.
Good reads
Scared of the dragon
In the end Chinese has been able to save some of its largest property companies but the troubles in the real estate sector has managed to scare off many investors.
India black ink
Just as China has started to fall out of favor for investment there is another giant, emerging real estate market that might be taking its place as India is now starting to garner more interest.
Back to the floor in ‘24
If you think that the office is dead then this new survey might shock you. It shows that 90 percent of companies expect to have most of their employees back in the office in 2024.
