In recent years, the business world has been trending towards thinking green—and more importantly, adapting their practices to become truly sustainable. More and more, companies are looking to adopt sustainable practices to reduce their environmental impact.
However, it can be challenging to know where to start. One main focus has been energy efficiency, which accounts for one metric within the broader scope of ESG (environmental, social, governance)—a comprehensive metric that evaluates a property’s sustainability.
ESG metrics are becoming an increasingly important consideration for businesses when choosing a new office space, making investment decisions, or assessing corporate social responsibility. Here’s what you need to know about ESG and how it differs from the ENERGY STAR rating system.
What Is ESG?
ESG is a term that refers to the three main categories of what are traditionally considered “non-financial” information that can affect a company’s long-term performance: environmental, social, and governance.
The environmental pillar in ESG represents the impact a company has on the environment. This can include factors like carbon emissions, waste diversion, and energy and water use.
Social refers to the company’s treatment of people and the community, covering things like a company’s contribution to society, the health and safety of employees, and equal opportunities.
Governance topics are focused on company and board oversight, such as corporate ethics, fairness in employment practices, anti-corruption measures, and transparency.
To put it simply, ESG refers to how sustainability factors into management decisions about using land and resources while maintaining profitability. Businesses can be profitable while also being sustainable by incorporating environmental, social, and governance issues into their decision-making processes.
ESG is important to consider when investing in a commercial real estate property because it can indicate how profitable a building will be over time. For example, suppose an employer does not have policies that ensure an equitable hiring process. That may result in fewer qualified employees, which could lead to higher turnover rates and lower productivity levels.
How Does ESG Work?
The real estate industry is experiencing a paradigm shift with a renewed focus on sustainability. ESG focuses on how social responsibility and environmental impact business operations.
ESG is an investment strategy that incorporates environmental, social, and governance factors in the decision-making process. The ESG investing approach aims to reduce risk by incorporating diverse company policies into the portfolio.
ESG metrics can provide significant insight into financial metrics. There are different ways to incorporate ESG in investing strategies. These can include criteria based on ethical processes, corporate/board diversity or transparent reporting.
Each of these categories has its advantages and disadvantages. While they all can provide value to the environment, society and governance, their profitability may not be as clear.
Why Do People Invest in ESG Funds?
There are several reasons why investors might be interested in ESG funds.
Risk management is an important reason for investing in ESG funds. Many see ESG investing as a way to protect themselves, their families, and their assets against various types of physical climate risks. For example, companies with poor environmental records could pose serious health concerns to nearby residents.
Companies with low labor standards may not provide safe working conditions or fair wages for employees, leading to increased turnover and lower productivity levels. Poor governance practices make it difficult for investors to hold management accountable and maintain transparency.
Diversification is a way to reduce risk. Investors look to diversify their portfolios so that if one investment decreases in value, the others will pick up some of the slack and mitigate losses.
People who invest in environmental, social, and governance (ESG) factors believe in reducing the risk associated with climate change or other sustainability issues. Those ESG investors may have different end goals for this strategy, but they all believe that ESG increases their diversification benefits.
Sustainability is one of the most popular reasons investors are drawn to ESG funds. Research has shown that sustainable companies are better long-term investments, as they have a lower risk of bankruptcy and are more likely to thrive in the future.
In addition, sustainable companies often have strong corporate cultures and good governance practices, leading to higher profits and stock prices.
How Is ESG Different From ENERGY STAR?
ESG factors are all important to consider when assessing a company’s long-term sustainability. ENERGY STAR, on the other hand, focuses exclusively on energy efficiency. It is also specifically a program of the US Environmental Protection Agency (EPA), whereas ESG is relevant to real estate owners globally.
One of the key differences between ESG and ENERGY STAR is that ESG considers non-financial factors such as environmental impact and social responsibility. These factors are not taken into account by the ENERGY STAR program.
Another difference is that ESG is voluntary, while ENERGY STAR is mandatory in some cases. For example, the EPA requires certain federal agencies to use ENERGY STAR–rated products and services.
ESG has a broader scope of review than ENERGY STAR because it includes governance factors such as board independence, executive compensation, and risk management.
Some companies choose to pursue ESG certification because it can be a valuable marketing tool. Customers who care about sustainability often prefer to do business with environmentally and socially responsible companies.
ENERGY STAR is a good way to measure a company’s energy efficiency, but it does not consider all aspects of sustainability. ESG is a more holistic approach to sustainability and can help companies identify areas for improvement in all departments.
Why Work With an ESG Data Management Solution for Commercial Real Estate?
The demand for ESG data in commercial real estate is growing rapidly, and with that growth comes a greater demand for data management solutions. ESG data management solutions are quickly becoming the preferred option for many businesses. There are several reasons why working with an ESG data management solution can be valuable for commercial real estate companies.
ESG data management solutions help companies become more sustainable. Sustainability is an increasingly important factor in the commercial real estate market, and ESG data management solutions can help businesses reduce their environmental impact and operate more sustainably.
Working with an ESG data management solution can be valuable for commercial real estate companies in many ways. If you’re looking for a way to become more sustainable, save time and money, and better communicate your efforts and results to stakeholders, an ESG data management solution can be a perfect choice. Contact us today to learn more about how we can help you maximize your ESG performance.