Smart Buildings

The ESG Problem & the Smart Building Solution

The term Environmental, Social, and Governance (ESG) has been around for almost 20-years but still conjures up a range of different thoughts and feelings for different people. For some, it is a force for good, bringing more humanness into the world of business, for others it is a weak attempt at regulation on serious global issues. For many corporate leaders, ESG is perceived as a direct threat to their only objective – increasing shareholder value - others agree with the responsibility of businesses to the world, and a growing number now see the business benefits of being “good”. However, the one thing everyone is now forced to accept, is that ESG is becoming a necessity for all companies and their buildings. “A combination of regulatory push, mandating ESG disclosures, and pull from a range of stakeholders will increase the stakes on ESG action (or inaction). Organizations that transform their business models over the next decade and […]

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The term Environmental, Social, and Governance (ESG) has been around for almost 20-years but still conjures up a range of different thoughts and feelings for different people. For some, it is a force for good, bringing more humanness into the world of business, for others it is a weak attempt at regulation on serious global issues. For many corporate leaders, ESG is perceived as a direct threat to their only objective – increasing shareholder value - others agree with the responsibility of businesses to the world, and a growing number now see the business benefits of being “good”. However, the one thing everyone is now forced to accept, is that ESG is becoming a necessity for all companies and their buildings.

“A combination of regulatory push, mandating ESG disclosures, and pull from a range of stakeholders will increase the stakes on ESG action (or inaction). Organizations that transform their business models over the next decade and put ESG front and center of their operations and culture, will reap the rewards,” reads a KPMG report. “Prizes for swift adoption may include greater brand loyalty, the ability to secure capital, increased profits and valuations. Those who fail to adapt, or who do so disingenuously, will face a reduction in market share, black-listing, severe penalties and potentially imprisonment.”

ESG was born out of a 2004 initiative by then UN Secretary General, Kofi Annan, who aimed to integrate better environmental, social, and governance practices into capital markets. The term itself was first coined in 2005 in a landmark study entitled “Who Cares Wins.” The environmental portion of the sustainability framework includes guidance related to climate change, GHG emissions, waste management, and energy efficiency. The social portion relates to human rights, labor standards, community engagement, as well as workplace health and safety. While governance relates to a set of rules or principles defining rights, responsibilities and expectations between different stakeholders in the governance of corporations.

International organizations, such as the Task Force on Climate-related Financial Disclosures (TCFD), the UN, International Sustainability Standards Board (ISSB) and the World Economic Forum (WEF) are aiming to standardize international disclosure requirements. Disputes regarding ESG issues have already wiped more than US$500 billion off the value of large US organizations in the five years leading up to the pandemic, with fines amounting over US$243 billion. And, according to a SmartCompany survey, 65% of international dealmakers believe ESG is a key consideration when making investments and in M&A decisions, while 60% say they have walked away from a deal due to a negative assessment on ESG issues at the target.

Stronger ESG regulation is inevitable and it will force all companies to act more responsibly, but in the meantime we are already seeing market forces penalizing those that do not step up their ESG game. Simultaneously, we are seeing significant incentives and strong cost-benefit scenarios emerging that are driving early adoption of ESG practices by brands that want to show their caring side to foster loyalty and increase profit. The greenwashing strategies of the past will no longer be enough for firms looking to develop brand recognition and attract talent from the ESG-savvy younger generations and that will increasingly drive investment, business, and real estate decisions towards ESG values.

“Responsible investment strategy caught on decades ago, but between corporate greenwashing, convoluted reporting bodies and disparate data, standards on ESG remain murky. One thing is very clear, though: Interest in ESG is heating up, and the real estate industry has the potential to make strides across all areas of ESG. Between ​​cloud applications, real-time sensors and dashboards, proptech poses a unique opportunity to streamline data gathering, auditing and reporting in real estate,” says Luke Haldeman, CEO of SmartRent. “While the ESG investment trend progresses, real estate investors may want to consider proptech solutions to not only deliver more equitable, environmentally friendly buildings but also hold their investments and partners accountable.”

The rise of ESG makes commercial buildings the low-hanging fruit for positive change, the long-term sustainability strategy, and the best-practice for company growth in an increasingly more accountable world.The environmental segment offers the most straightforward ESG returns for building stakeholders. Energy and water efficiency, renewable generation, local emissions, and waste management all offer established systems for improvement and measurement. The social portion can be more complex but presents a wide range of ESG opportunities through workplace health and safety, which have gained even greater significance since the pandemic began. While governance not only ensures the long-term commitment to environmental and social responsibility, but also future-proofs businesses and buildings against the ESG trend. 

“The real estate sector could potentially suffer the same fate as the oil industry if there’s not enough action taken to become climate neutral. With the usage of technology and growing awareness of ESG, the built environment is in for a change,” says Deb Noller, Co-Founder and CEO of Switch Automation. “ESG reporting and investing saw a steep upwards trajectory in 2021, as public attitudes and investor demands shifted towards increased conscientiousness for environmental and social factors. This is set to continue in 2022, with 50% of global asset owners currently implementing ESG data/analytics into their investment strategy by 2025.”

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