COVID-19 has deeply impacted the way investors evaluate real assets
To communicate their ESG performance to stakeholders and investors, many commercial real estate owners still rely on annual benchmarks such as GRESB and CDP. For the moment, that standard doesn’t seem to be phasing out. For example, even during a challenging year, participation in the 2020 GRESB Assessment grew by 22% to cover 1,229 portfolios worth more than $4.8 trillion AUM.
While businesses recover from COVID-19 and a lockdown far longer than any of us anticipated, more investors are turning their attention to ESG as a way to determine which companies are truly capable of surviving existential risks. At the same time, stakeholders are beginning to ask for data that’s timely and relevant—which goes beyond the scope of an annual benchmark.
Major law firms see a host of disclosure lessons from the pandemic and encourage their clients to communicate their sustainability story to investors fully and clearly, instead of solely relying on existing benchmarks.
“Companies would be well served to continue their sustainability and similar reports regarding climate change and other ESG matters and should consider addressing public health issues if possible,” Foley & Lardner said in a note to clients early in the pandemic. Foley & Lardner is an international law firm that focuses on the constantly evolving demands facing their clients and their industries.
“While ESG as a whole can seem overwhelming, especially in the midst of a global pandemic, the business world has been rapidly shifting its focus to spotlight the importance of being prepared for the reality of climate change. Now, the business world must also add coping with a pandemic and planning for its aftermath.”
Working toward resilience
Foley says SASB and TCFD standards can help companies adapt to big-picture threats—like global pandemics—by adhering to standards and addressing other existential threats.
Law firm Akin Gump has warned its clients that both during and after the pandemic will need to redefine their material risk assessments and inform disclosures. To address the risks of the pandemic and reduce uncertainty, the firm counsels companies to rely on the “traditional earmarks of an effective ESG program—such as target setting, road-map implementation, data collection, and reporting—with a critical eye toward the unique and financially material issues the pandemic presents.”
While the pandemic is still in full swing, this may mean disclosing timelines for safely transitioning remote workforces back to offices or releasing information on employee and customer health and safety outcomes.
“In the intermediate term, companies could look to disclose plans to chart a course toward financial security and sustainability while reporting on the documented impacts of the crisis on companywide and business-unit-specific ESG goals,” AG wrote in a note to clients. “For many companies, these assessments will inform disclosures on a range of issues, including workforce and customer safety, and could tie into existing or new environmental and sustainability initiatives.”
The firm says well-prepared companies will “internalize the lessons from this pandemic and adjust their risk assessments across the panoply of ESG topics to include the real consequences we can expect to see from climate change, future pandemics, terrorist and cyber-attacks, and supply chain disruptions.”
Well-prepared companies will internalize the lessons from this pandemic and adjust their risk assessments across the panoply of ESG topics to include the real consequences we can expect to see from climate change, future pandemics, terrorist and cyber-attacks, and supply chain disruptions.Akin Gump Law Firm, quoted in Los Angeles & San Francisco Daily Journal
In particular, DeLoach encourages CFOs to be more forward-looking in their disclosure, providing single- and multi-year future targets, goals, and narratives. “Focusing solely on past performance and accomplishments presents a limited perspective,” he says. “A balanced view that considers future goals and commitments aligned with the strategy presents a fuller picture for investors. Tying goals to the United Nations’ Sustainable Development Goals and reporting against targets through 2030 adds credibility.”
Disclosure has become central to investor decision-making
Where previously investors may have seen ESG flags in prospective investments as factors to overcome or mitigate, such flags are now more likely to be deal-breakers. ESG is starting to impact the pricing of assets, says Katherine Sherwin, BlackRock’s Global Head of Real Assets ESG Integration.
“If you’re investing in a prime office location, a building that is more sustainable and energy-efficient will have lower operating costs,” she says. “If it’s more sustainable, the likelihood is you will be able to lease up that property more easily and probably command higher rental value.”
But how can sustainability reports and disclosures incorporate pandemic risk in the future?
As the concurrent effects of the coronavirus crisis and climate change continue, a comprehensive risk strategy must now incorporate both.Dylan Bruce and Sansanee Dhanasarnsombat
Analysts at Bloomberg Law see parallels between pandemic risk and conventional ESG analyses. Like climate change, a pandemic isn’t easily predictable, but it is foreseeable—the World Bank and the World Economic Forum warned of pandemic readiness in 2019.
“A central tenet of ESG consideration is to identify and communicate a company’s operational performance and risk exposure relating to ESG factors. Even before the pandemic, companies worried about blind spots in their assessments of the impacts of climate change,” Bloomberg analysts Dylan Bruce and Sansanee Dhanasarnsombat wrote in May 2020. “As the concurrent effects of the coronavirus crisis and climate change continue, a comprehensive risk strategy must now incorporate both.”
Bruce and Dhanasarnsombat observe that COVID-19 and climate change impact the same ESG performance areas: “The ways a company responds to new and immediate demands on their workforce—such as working from home policies—have an impact on that company’s ESG performance in the social context. Additional considerations will include workplace safety, data privacy, job security, and community impact.”
Investment managers—especially of Real Estate Investment Trusts—are under pressure to hit triple-bottom-line results using ESG ratings and rankings, says Rachel Gutter, president of the International WELL Building Institute. The most crucial measure for real estate is the GRESB, which validates scores and benchmarks ESG performance data, providing engagement tools to investors and managers.
“Businesses at large—especially publicly traded companies—are looking for all the different ways in which they can max out their ESG performance,” says Gutter. “They’re looking to be at the top of the scoreboard when it comes to GRESB achievement.”