ESG and real estate under the spotlight

It was not so long ago that real estate was viewed as the epitome of capitalism. That view is fast giving way in the face of a trend in quite the opposite direction. The focus on ESG (Environment, Social and Governance) has just recently been given its most emphatic direction when the JSE issued its Sustainability Disclosure Guidance in June 2022.

ESG standards are currently being adapted to real estate by property developers and enforced by some government regulations. This comes in response to a growing awareness that real estate has a considerable social impact either through the rehabilitation of public spaces, affordable and social housing or through an environmental focus investment on new buildings such as green buildings.

The JSE’s Sustainability Disclosure Guidance was issued as a tool to listing issuers enabling them on a voluntary basis to better navigate the global sustainability and ESG landscape. It adapts that global landscape to South Africa’s specific sustainability challenges, improving the quality of sustainability and ESG information to enable more informed investment decisions. In the process it aims to drive improved sustainability performance, accountability and business leadership.

The JSE no doubt felt compelled to address this subject given that investors and other stakeholders are increasingly expecting companies to report with the same rigour as they would apply for financial information, but now to their sustainability impacts, risks and opportunities.

The Guidance recommends that organisations should provide disclosure on their:

• Governance: spelling out the board of directors’ oversight of sustainability-related impacts, risks and opportunities, and its process for integrating sustainability issues into the overarching governance approach.
• Strategy: describing how their assessment of sustainability-related impacts, risks and opportunities has influenced the board’s strategy and the consequent impact of this on overall performance.
• Management: explaining how sustainability-related impacts, risks and opportunities are identified, assessed, and integrated.
• Metrics, targets, and performance: identifying those used by the business to measure, monitor, and manage its sustainability impacts, risks and opportunities, and its performance against these.

While this is useful, listed real estate companies may find it more practical to have it spelled out how the JSE Guidelines translate to their industry and its capability to impact investor strategies and stakeholder relationships.

The following are the most important current ESG considerations for real estate related stakeholders, which comply with the JSE’s Guidelines:

Environmental

• Net-zero becomes the new norm: Put simply net-zero is the balance between the amount of CO₂ produced and the amount absorbed from the atmosphere and is reached when the amount we add is no more than the amount taken away. Pressure is increasing on property owners and managers to reduce their carbon footprint and contribute to carbon neutrality. While this may not necessarily generate higher investment returns, it will in future play a prominent role in preserving asset value as occupiers increasingly shy away from properties with subpar environmental performance. Furthermore, as occupiers and investors are drawn to properties that are more sustainable, these assets will become worth more. 
• Disclosure metrics: These include governance, strategy and the adoption of ‘green leases’ between landlords and tenants that meet certain environmental objectives and efficiencies in energy, water and waste services.
• Climate change, risk and cost management: Recent disruptive situations such as the Covid pandemic, political unrest and extreme weather events in KZN have put into clear perspective how ESG improves real estate resilience by highlighting risk and cost management issues. Stakeholders will specifically want stock issuers to disclose business continuity plans for buildings in disruptive situations.

Social

• Mixed use developments: It is a truism that the property industry is an integral part of communities as buildings cannot be physically separated from surrounding communities. ‘Impact’ investments seek to generate mutual social and environmental benefits as well as the more typical financial returns. This underpins the increase in South Africa of mixed-used developments integrating residential, office, retail, hospitality, and sometimes entertainment and medical elements. This ‘one stop shop’ provides tenants and customers alike with significant environmental benefits of lower fuel and transport costs.
• Employee wellness: Covid has heightened awareness around hygiene and employee wellness.  For the real estate industry this translates into landlords and facilities managers redoubling cleaning routines and public availability of disinfectants and hand sanitisers. Other options for employees could include natural light at workstations, healthy food options, exercise opportunities and mental wellness programmes for employees.

Governance

• Responsible business: Governance relates to an issuer’s values, ethics and concept of ‘doing business for the common good’.  Many real estate companies have long since adopted corporate social responsibility policies as being impactful and beneficial on their performance and stakeholder relations. The heart of responsible business lies in illustrating a corporate culture and set of shared values for both the company as well as its employees and communities in which it operates.

All of these taken together clearly point to a ‘conscious capitalism’ – one in which businesses make a social impact and see the benefits in becoming more successful. This is how the real estate industry can empower staff, inspire clients, boost its reputation and attract potential investors.

Author
Susan Truter, Partner

16/08/2022