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How Commercial Real Estate Can Elevate the “S” in ESG

This year, companies and investors have had to confront and demonstrate their values and priorities on a very public stage. Whether it involved working to mitigate the impact that COVID-19 had on their employees and customers, or responding to protests illuminating systemic racism, firms have been forced to reexamine the way their businesses affect and interact with the communities in which they operate.

Over the past decade, the transition from sustainability to ESG (environmental, social, governance) has ushered in a broader perspective on the way that companies should be held accountable for their actions. Firms are expected not just to measure and disclose their environmental impact, but also their humanitarian impact—in the way they hire and retain employees, ensure their suppliers adhere to similar ethical standards, give back to their communities, and more. 

This doesn’t mean that environmental issues are taking a backseat. In fact, when companies on a large scale do more work in one area, the other benefits, because the “E” and “S” factors are inextricably linked. For example, studies show that historically marginalized communities are disproportionately impacted by the effects of climate change. 

However, companies are finding that, unlike environmental data, which is generally “easier” to quantify and track, metrics for social impact are much more nuanced and difficult to identify. In a 2019 global ESG survey, 46% of respondents found the social component of ESG to be the most difficult to analyze and embed in their strategies. Though it may be challenging to measure and incorporate, the S in ESG has been thrust into the spotlight and will likely be top of mind for stakeholders for the foreseeable future.   

Where to Begin

Though companies may need to take a slightly different approach to measuring their social impact, the initial strategy is similar: Collect as much as information as you can, as soon as you can. Unlike environmental impact data, pertinent information can’t be found in utility bills and waste output calculations. Instead, as Measurabl CEO Matt Ellis noted in a recent webinar, social efforts are often captured in policy and governance documents. 

It’s likely that as social issues begin to expand and become more material to businesses, benchmarking organizations will require more comprehensive documentation. Companies will need to document all of their efforts to show the qualitative work they’re doing—showing their baseline performance, detailing efforts to improve, and clearly articulating what their goals are for the future. 

However, there is no standardized way to compose, develop, and communicate what’s in a policy document. When there’s no set standard for policy disclosure, it can be difficult to cleanly compare one company’s performance in this area with industry peers. So how do you determine key success metrics and identify areas of improvement?

Owning Your Narrative 

Just like environmental data, there are myriad types of information to collect, and a seemingly endless array of potential standards and benchmarks to choose from. That’s why it’s more important than ever to determine and focus on what is material to your business

Commercial real estate firms, for example, may decide to examine the way they impact and interact with the local communities in which they’re developing and investing. Firms may seek to improve the way they manage their supply chains, ensuring that all of their suppliers, contractors, and partners live up to their own standards for ethical behavior as well as employee and community relations. Companies might also look internally at their diversity, equity and inclusion policies to determine whether people of all backgrounds, genders, and races have a fair chance of being hired, compensated fairly, and promoted equally. 

These factors are not only important to a brand’s reputation—they can also directly affect a company’s bottom line. Poor employee relations, for example, can lead to turnover, inability to attract and retain talent, labor strikes, and consumer boycotts. CRE firms that fail to engage with their communities and maintain good rapport with local residents can be effectively shut out from future development projects in those areas. And a lack of diversity in leadership and among the workforce as a whole in general not only fosters a sense of inequality—it also prevents companies from benefiting from a breadth of fresh ideas and approaches from individuals with diverse backgrounds, experiences, and perspectives. 

That’s not just a nice idea: Boston Consulting Group study found that companies with more diverse management teams have 19% higher revenues due to innovation. This and many other recent studies point to a powerful business case for leadership and workforce diversity. 

While tracking and disclosing environmental data like energy consumption and carbon output may have once been just another box to check for many CRE firms, companies are discovering an array of financial and intangible benefits that result from an enhanced focus on sustainability. As firms become more intentional in tracking and improving their social performance, they will begin to see unexpected benefits—especially as investors and stakeholders are paying more attention to these efforts.