By and large, people are growing more concerned about the impact their lifestyles and choices have on the environment, and many are choosing to throw their weight as consumers behind companies that are environmentally and socially responsible. Investors, too, are realizing the importance of ESG (environmental, social, governance)—and not just because it’s the right thing to do, but also because it can affect a company or fund’s long-term viability.
Mitchell Kraus, a chartered SRI counselor at California-based wealth manager Capital Intelligence Associates, believes there are two reasons individual investors look at ESG. First, they want to align their values to their portfolio by not investing in anything to which they are morally opposed. Second, they are looking for companies with similar values to their own.
Kraus says examining a firm’s ESG disclosure can be a screening tool to create potentially better long-term portfolio returns. Yet he advocates caution in reviewing current ESG disclosures.
“While a firm’s financial reports are based on a long history of standard accounting, ESG reports tend to be more conceptual and harder to compare. Greenwashing is a consistent problem with firms trying to improve their images,” Kraus says. “Most ESG rating services are based on arbitrary values and not always rooted in fact. I believe as ESG investing matures, more and more companies will start filing ESG reports in more standardized formats, so that investors have an easier time comparing their sustainability to similar companies.”
Crisis as a Catalyst for Change
Kraus thinks ESG disclosure in the real estate sector will become increasingly important post-pandemic. In his home state of California, Kraus says before the pandemic, there was a growing trend towards higher green standards of all buildings. Yet his clients showed little interest.
The positioning of green was an industry-wide problem: Buildings that were certified “green” had stickers in the lobby to prove it, and didn’t hold much weight beyond that. However, the transition from “green” to ESG, a more holistic approach to sustainability—as well as the events that rocked 2020—have reshaped the way that sustainable buildings are viewed within the market.
“Green buildings were used more as trophies to the building owners who are not looking at resale values besides efficiencies that might be provided,” Kraus says, adding that before 2020 he had seen little social and governance progress in the real estate companies he follows, including scant attempts to diversify boards.
But during the COVID-19 pandemic, Kraus has seen disclosures changing in the real estate sector.
“I believe as ESG investing matures, more and more companies will start filing ESG reports in more standardized formats, so that investors have an easier time comparing their sustainability to similar companies.”Mitchell Kraus
“There is a lot of talk about a crash in the commercial real estate markets, and I see owners looking to improve ventilation and create safer buildings for all its tenants.” Kraus says. “But unlike the stock market that trades in real-time, the real estate market moves much slower. It is hard to see trends in investments after a few months regarding ESG upgrades and sales prices.”
Many financial professionals now believe that the increased demand for improved ESG disclosure is a recognition of sustainability as an indicator of a company’s ability to manage risk—and therefore be a savvy investment.
“I think that investors will continue to demand that actions and disclosure improve dramatically across both environmental and social measures,” Walker says.
Out of ‘Survival Mode’ and Into the Future
Recently Kraus has found that his clients have started looking at social and governance issues through the lens of the Black Lives Matter movement. But as the COVID-19 pandemic continues, more of his clients are looking into future “natural phenomenon” and seeking to invest in companies that are prepared for what might happen next and trying to improve the world it relates to climate change.
“Investing in companies that understand their long-term outlook depends not only on their ability to make a profit, but also the world’s ability to combat climate change—and this idea makes sense for many individual investors,” Kraus says.
Misser agrees that while the momentum for ESG investing was building pre-coronavirus, the pandemic has accelerated investor scrutiny around sustainability reporting and disclosure. And in the future, the desire for greater scrutiny is likely to be shared by even more investors.
“The next generation of investors are a more diverse group of people who invest with their conscience, so I don’t think that is going away anytime soon,” Walker says.