WHAT IS ESG? (AND WHY DOES IT MATTER?) November 23, 2022 | Maintenance , Investment , CRE News | business tips , real estate trends , commercial real estate tenants , save money Commercial Real Estate is a varied field where people of many different backgrounds converge. New ideas and strategies are actively traded as everyone is looking for the best way to get a strong return on investment. While looking to accomplish these lofty goals, you may have run into an unfamiliar term: ESG. Many CRE investors have prioritized ESG while developing their portfolio and are starting conversations on blogs and on podcasts citing its importance. To get you caught up to speed, here is an overview of ESG, why it has become a topic of discussion, and how it might change how you operate within CRE. What is ESG? To keep it short: ESG is an acronym that stands for Environment, Social, and Governance. It is a type of unstandardized philosophy by which commercial real estate investors (and investors, in general) filter their investment pursuits, with special care for these three “pillars.” One might also consider it a moral standard that an investor chooses to adhere to. The term “ESG” was first referenced in 2004, through the United Nations’ “Who Cares Wins” report . Here, the term is used much as it is used today, as a recommendation on how to build sustainable businesses and care towards how investments impact culture. Though this socially conscious type of business operations could be traced even further back ( even to the 1950s ), its popularity has seen a surge in recent years due to increasing attention to climate change and as a result of the coronavirus pandemic . In March of 2022, the US Securities and Exchange Commission released a proposal on disclosure requirements on impacts to the climate for investors, and expectations are that legislation standardizing ESG principles are on the horizon. To operate as successfully as possible, let’s discuss how this impacts the world of CRE, and what this means for commercial real estate investors. The E, S, and G Each pillar of ESG has come to mean something more specific since its inception, so let’s break down each point at its principle level before moving into what that looks like as a commercial investor. Environment - The environment pillar refers towards the foundation of being responsible actors in the business sector with regards to impact on the natural world. This pillar has come to refer to an overall goal of making the world more sustainable, with more attention towards cutting back on resource hungry business ventures. Transparency for businesses’ impact on the environment has been pressured if not through legislation (depending on the industry), through social demands. For commercial real estate investors, adhering to the “E” in ESG can mean anything from prioritizing green, environmentally friendly buildings when considering renovations, to offering clean energy amenities. Of the chief principles leading ESG, environmental guidelines seem to be the most likely to see tangible legislation. Social - This pillar refers to socially conscious business practices, and the related standards that morally responsible businesses should adopt. Socially responsible investing (SRI) is another common term that focuses on this principle in particular. In general, this principle has been translated into business operations that tackle issues of diversity, social justice, and discrimination. In the space of commercial real estate, the “S” in ESG has been translated to promote health among property owners’ tenants and their communities. This usually means offering amenities to encourage healthy living, or choosing tenants that have a positive impact on physical or mental health. Governance - Traditionally, this pillar refers to practicing general transparency in leadership to the public, pursuing diverse representation in leadership, and practicing accountability. Some businesses have also taken this responsible leadership standard to mean operating without preferential treatment based on politics or other discriminatory practices. In CRE, investors have translated adhering to this Governance principle as simply practicing honesty, offering transparency when possible, and operating with accountability. Likewise, investors following ESG principles will support businesses that do the same. ESG is a business philosophy that is gaining steam within the past few years. As an investor in commercial real estate, championing ESG can mean many different things, but the ideology at its core can be simplified further. In search of profit and the best return on investment, remember to set firm ethical standards, and stick to them! ESG, ultimately, is meant to promote ethical investing and accountability. For your next commercial property inspection, contact NPI to find a property inspection expert near you!