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Larry Fink’s Letter and the Continuing Evolution of ESG and CRE in 2022

How the push for decarbonization is transforming ESG transparency and reporting

As we kick off 2022, it’s important to reflect back on how transformative 2021 was for advancing the way ESG is perceived and demanded. With record-high employee quit rates, environmental crises, and social justice reform happening around the world, being transparent and accountable with ESG data is more important than ever.

BlackRock, a global investment manager, has used sustainability and green thinking as a benchmark of measuring company performance for years. CEO Larry Fink is taking that commitment to a new level by asking one serious question in his 2022 letter to CEOs worldwide: “Every company and every industry will be transformed by the transition to a net-zero world. The question is, will you lead, or will you be led?”

This question carries a warning call to every sector – all of which will inevitably be changed by sustainable technology. Fink highlights the idea that those who decarbonize will be those who lead. Leveraging the power of actionable ESG data is crucial in this global transition towards a net-zero world.

Looking Back at the Progress We’ve Made

The interdisciplinary adoption of ESG data in strategic decision making and investing has proven necessary, especially in the context of our built and natural environment. In late 2021, a $1 trillion infrastructure bill, including $47 billion intended for climate resilience efforts, hit President Biden’s desk. This infrastructure bill contains the highest amount of money that the U.S. has ever spent towards addressing climate change, and it received bipartisan support. All buildings face some degree of physical climate risks, and 2021 took steps towards community-based action within our government and beyond. 

Morningstar reported that in 2021, the higher a company’s ESG score was, the higher returns they saw. Companies in Morningstar’s U.S. Sustainability Leaders Index returned 33.3% in 2021, more than 8% higher than the broader U.S. market. Companies that had better ESG risk assessments outperformed those with weaker scores, with 2021’s numbers acting as further proof that investing with sustainable strategies can deliver financially competitive returns. 

Fink believes that the transition to net zero is inevitable. The year-over-year growth of ESG being an integral part of both federal attention and investor demands is evidence that companies will need comprehensive data management tools to keep up with stakeholder requirements. 

Related: How Real Estate Companies Can Work Toward Net Zero 

Looking Inward and Making Decisions that Reflect Our Values

2021 also illustrated the outcome of what Fink refers to as stakeholder capitalism. Employees are asking more of their employers, and the historically high quitting rate in the U.S. shows that employees are not afraid to look elsewhere if a company does not share their values. The Kenan Institute, a research facility committed to developing market-based solutions to economic issues, lists three main stakeholders as driving forces in the pursuit of diversity, equity, and inclusion (DEI) in company culture—values that were highlighted by the pandemic. The stakeholders the Kenan Institute reports as most relevant to this progression are the following: regulators, investors, and employees. 

  • In the U.S., The Securities and Exchange Commission (SEC), along with other regulators, have been taking steps towards a regulatory framework in DEI, including the requirement of diversity data disclosure. This could include things like the reporting of gender-specific income gaps or the development of policies surrounding an equitable hiring process. 
  • The Kenan Institute reports on a survey performed by The Institutional Limited Partners Association, which found that 40% of investors are considering incorporating DEI metrics in their diligence efforts. Investors are quickly adjusting their expectations and criteria for investment with regards to DEI. 
  • Finally, employees are demanding more. A 2021 CNBC survey on workplace happiness reported that 80% of surveyed employees find it important to work somewhere that prioritizes DEI. Fink’s effective stakeholder capitalism illustrates this point, in his expression of just how vital it is for companies to have a voice, a strategy and a purpose that employees can connect with. 

Looking Forward to 2022 and Beyond

In November 2021, EY reported that construction and engineering firms have a powerful role in influencing ESG reporting. Health, safety and labor, contracts/bidding and carbon emissions from construction sites are just a few of the leading ESG considerations driving change in the industry. 

The report quoted a statistic from The World Green Building Council: 39% of global carbon emissions come from buildings and construction. The past year really showed how risk management is increasingly important to this sector, as those working in infrastructure are being increasingly held responsible for these emissions. EY’s survey also reported that 98% of investors evaluate ESG performance based on corporate disclosure, which has pushed corporate boards and management to take on the challenge of doing more, while leading with transparency. This includes the integration of low-carbon processes, sustainable engineering practices, and gender diversity across leadership and board members, as well as the workforce at large. 

BlackRock is acknowledging this growing interest in shareholder involvement and communication. To recognize the interest in corporate governance, BlackRock is starting off 2022 by pursuing the internal expansion of proxy voting. “We see a growing interest among shareholders—including among our own clients—in the corporate governance of public companies,” says Fink. “This is why we are pursuing an initiative to use technology to give more of our clients the option to have a say in how proxy votes are cast at companies their money is invested in.” BlackRock’s dedication to expanding proxy voting allows for more voices to be heard, in a more transparent and equitable manner.

Related: Social and Governance Emerge as Leading ESG Indicators

ESG Makes Investment Sense 

Fink sums up his announcement by stating that while there is more learning to do and more work to be done, the data has shown that companies that are intentional about their decisions and values have returned higher performance rates. The federal government, economic research facilities, construction firms and financial experts all seem to have an underlying commonality: taking ESG into consideration is the best option for success. 

2022 holds novel opportunities for positive growth in the CRE sector, with the push for decarbonization and green systems thinking gaining momentum across all industries. Comprehensively incorporating multiple aspects of ESG within an organization is the first step in effective stakeholder capitalism. The evolution of environmental, social and governance standards are in our hands—and to our advantage. 

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