In the past few years, we’ve seen many changes to the workplace including a drastic shift in the value drivers of commercial real estate (CRE). The things that once made a workplace enticing and meaningful — such as its location and its physical amenities — are being challenged by an equally heightened focus on appealing to the actual consumer. And, it’s important to note, appealing to a consumer in 2021 includes meeting their value- and ethics-related expectations.
The people who work in and around your property have high stakes in building a workplace that engages the end-user, with consumer-first experiences being curated to help property teams to stand out among the CRE competition. But now, based on my work with HqO’s European clients, some of the most important values needing to be incorporated into these experiences to meet consumer expectations revolve around ESG — that is to say environmental, social, and governance.
ESG has quickly risen in the ranks of importance to CRE. Incorporating ESG into a building’s operational and financial model is still in its early stages, but ESG already has a significant impact on the success of a workplace’s leasing abilities and user experience. Join me as I paint the picture of just why ESG has become so important to CRE, and let us share some considerations that should be top of mind for every CRE leader in formulating an ESG action plan.
ESG’s Impact on Commercial Real Estate
ESG initiatives in the workplace are on the rise, stemming from the ongoing climate crisis and CRE’s role in fostering more socially responsible environments. In fact, 82% of respondents from ULI’s Emerging Trends In Real Estate survey consider ESG elements when making operational or investment decisions. Currently, we are seeing three main reasons why property teams are investing heavily into ESG:
- Because tenants care. Tenants are now actively (or even exclusively) seeking spaces that are appropriately certified and labeled to provide a place where employees are proud to work to enhance their employer attractiveness. In a PwC survey, 86% of workplace employees preferred to support or work for companies that cared about the same issues they do, including ESG. Further supporting this sentiment, a recent MarshMcLennan report states: “By 2029, the Millennial and Gen Z generations will make up 72 percent of the world’s workforce, compared to 52 percent in 2019. These generations place greater importance on environmental and social concerns than their predecessors do — and will expect more from employers on these issues.”
- Because the price of not caring just got a lot higher. In France, the décret tertiaire is going to start applying penalties next year for those not taking action to implement carbon-cutting initiatives. In the United States, the price tag for non-adherence is also getting steeper — with one company even receiving a penalty of $9,500,000 for misrepresenting their annual environmental compliance. Avoiding such penalties requires creating an ESG action plan immediately.
- Because investors care. More and more funds are labeling, which means that the money must go to uses that are certifiably green and/or responsible. According to CBRE, 60% of respondents to its 2021 Global Investor Intentions Survey stated that they have already adopted ESG criteria as part of their investment strategies, with the Americas, EMEA, and Asia-Pacific all recording a stronger focus on ESG issues than in previous years. Given that CRE has historically been a carbon generator, the mentality needs to evolve swiftly for the capital needed to keep investing to continue to flow.
With its importance clearer than ever, we at HqO have begun to help property teams pinpoint ESG-related opportunities and form effective strategies for their buildings and tenant communities.
Breaking it Down
To fully understand ESG opportunities on a holistic level across a given portfolio, we advise looking at the E, the S, and the G aspects of ESG as separate initiatives. In the end, these will work together to create a more comprehensive strategy.
- Environmental: This category represents how a property is impacting the physical environment around it, through consumption such as water, electricity, and energy, as well as the waste it produces. Property teams need to ask themselves: Where can my building be consuming less, or at least more responsibly?
- Social: This category represents more human concepts, such as a company’s inclusion, diversity, and community policies. Thus, property teams need to ask themselves: How are communities brought together within my building? How about within my neighborhood? How are local businesses promoted?
- Governance: This category represents the policies and reporting that are going to dictate how a property operates. Here, making sure that Environmental and Social principles are incorporated from the start is key in tracking their progress. In my experience, the most successful ESG strategies are baked right into the property team’s procurement process (i.e. working with local providers or sourcing raw and local goods).
Once teams have broken down their own practices, then they can move on to the next step: bringing tenants into the ESG mix.
Responding to Market Needs
Various initiatives can be undertaken in order to get closer to achieving ESG goals. Fortunately, companies like HqO can help bring tenants themselves into this equation to elevate the impact. While tenant programming absolutely depends on the initiative, we follow the basic principles below with our clients:
- Inform: We believe that property teams need to let people know what overarching policies are applicable to their building. Whether it’s explaining the current carbon emissions of their properties, hosting ongoing local challenges for communities, or sharing policy goals at a local or national level, it is important to let tenants know what is happening and why. For example: In France, the décret tertiaire is a policy put in place to get buildings’ carbon emissions down by 50% by the year 2030.
- Educate: Property teams need to let tenants know what the implications of their actions within the building are. How are these consumptions currently communicated to the tenant? This is about making sure the wider cause is relevant to the individual user. An example of this might look like sharing facts around common behaviors or practices in the workplace. For example: Did you know that the way a building is used by employees determines over 50% of its carbon emissions? Lighting a full building contributes to this carbon emission, and unfortunately our building lights are on a lot — even on most nights or weekends.
- Call-to-Action: Different campaigns can be organised to encourage tenants to adopt a different behavior. Property teams should always be specific and address what a user can do to change the situation. This includes modifications they can make to their daily routine, and what their individual contribution will amount to. If you want tenants to change their behaviors, what incentives are you giving them? For example: having tenants pledge to turn off the lights before they leave the building, as well as on the weekends, can help reduce lighting bills. This tenant action can be rewarded with tokens of appreciation such as free coffees or lunches after meeting a specified goal.
- Report: Lastly, of course, share the results! With some hindsight and data, initiatives are always stronger when property teams can show a strong cause and effect relationship to those who participated in the action. An example of this might look like a notice to tenants and their employees congratulating them on reducing their lighting energy consumption, and re-stating that they are one step closer to meeting their décret tertiaire goal.
Overall, ESG will be one of the major global themes for CRE in 2022. These programs will increase a building’s competitiveness and attractiveness for companies who increasingly are looking for properties that match their employees’ expectations. Organising an ESG strategy and set of initiatives can be daunting, but ESG can become part of your daily operations — one step at a time.
For more information on how you establish an ESG-friendly workplace, schedule an HqO consultation today.
