By Sara Anzinger, Senior Vice President of Capital Markets, Measurabl
Though ESG had reached a mainstream tipping point long before COVID-19 stopped the world in its tracks, the events of 2020—namely the pandemic and mobilization around social justice issues—accelerated that trend. These historic events made the general public as well as capital providers more aware of systemic risks and the need for companies to be prepared to adapt quickly. Such considerations also clearly lend themselves to climate risk.
Last year in his annual letter to chief executives, BlackRock CEO Larry Fink, discussing markets pricing in climate risk, predicted that, “In the near future—and sooner than most anticipate—there will be a significant reallocation of capital”. What seemed like a bold statement in January 2020 materialized as somewhat of an eerie premonition as the global pandemic took hold. Even in a struggling economy, funds with strong ESG performance saw record inflows: $288 billion was invested globally in sustainable assets, a 96% increase over 2019.
This notable growth in ESG investing justified what many of us in sustainable finance know to be true: That companies can “do well by doing good”. Moreover, companies that are not paying attention to ESG risks and opportunities will ultimately have fewer funding options than those who are faithfully disclosing and continuously working to improve their ESG performance.
This can pose a particular challenge for commercial real estate—an industry that has traditionally been conservative and slow to adopt new processes and technologies. However, this mindset is shifting at the urging of investors, lenders, and other stakeholders who are expecting greater transparency around ESG measurement and performance tracking.
ESG Risks as Financial Risks and Opportunities
Sometimes referred to as non-financial information, ESG and climate risk is increasingly understood by capital markets as financially material. In order to unpack the full spectrum of financial risks and opportunities, investors and lenders need reliable data. Disclosure frameworks like Sustainability Accounting Standards Board (SASB) and Taskforce on Climate-Related Financial Disclosures (TCFD) focus on the measurement, management, governance and integrated disclosure of ESG and climate issues, and are seeing growing support.
Yet reliance on static, indicative data is still commonplace. Company-level ESG scores or rankings generally rely upon stale, self-reported data and reflect a third-party intermediary’s subjective assessment (methodology and weightings) of performance. Within the real estate sector, building certifications and labels, such as LEED and EPC, typically reflect theoretical or indicative energy usage based on design models and not actual energy consumption.
Such certifications and ratings will likely continue to be relied upon for some time to come. However, capital markets are beginning to think beyond static proxies produced by third-parties, e.g. ”certified” or “not certified”. I believe this binary view will continue to dissipate over the next three to five years as equity and debt providers stop asking, “Is this company or building sustainable?” and look instead at all relevant transition and physical climate risks, asking, “Where on the transition spectrum is this company or building positioned” and “Is it moving towards sustainability, becoming more resilient, and how?”
Setting a Higher Bar for Data Quality
Addressing the “how” and verifying it is key. As sustainable finance markets continue to develop, investment proceeds and decision-making will increasingly be tied to ESG outcomes. Concerns over greenwashing will only increase if science-based targets do not inform the market and environmental claims are not adequately verified.
As more ESG data is provided to the capital markets, its quality—accuracy, completeness, and timeliness—will increasingly be scrutinized. Fortunately, the accelerating trend toward sustainability has been parallelled by acceleration in technology and digitalization, which are being leveraged to source actual, objective, impact-focused, data to inform companies and their capital providers.
When Moving Mountains, a Coordinated Approach is Key
Climate change seems inevitable when we are unable to imagine how existing technologies, collaboration, and future innovation, can help us mitigate the daunting challenges ahead. Though innovation in real estate has traditionally been driven by competition, a zero-sum game will not help us transition to a low-carbon economy.
This is not to say that there won’t be competitive advantages for climate leaders along the way, but joint accountability is the only viable path to long-term success. Even if some companies and buildings achieve net-zero by 2030, in order for anyone to fully reap the benefits of climate change mitigation, all must do their part. Real estate capital providers and owners alike are seeing that we can get there a lot more quickly if we build networks and alliances that motivate meaningful change and amplify positive impact.
We’re already seeing this materialize with standards like the Partnership for Carbon Accounting Financials (PCAF) and the UN-convened Net-Zero Asset Owner Alliance. PCAF, which enables financial institutions to assess and disclose the greenhouse gas emissions embedded in their loan portfolios, is key to preventing emissions from just shifting off one lender’s balance sheet on to another’s, thereby increasing the likelihood of systemic change and global carbon reduction. The Net-Zero Asset Owners Alliance has catalyzed 33 institutional investors with $5.1 trillion in AUM to commit to aligning their investment portfolios to 1.5 degree celsius warming.
Capital markets are, of course, only one piece of the puzzle. There is also the inevitable policy response, as governments worldwide take steps to align their national economic and development pathways with long-term climate strategies and the Paris Agreement goals. In recognition of this, the Net-Zero Asset Owners Alliance identifies corporate and industry engagement and public policy support as its means to a net-zero end. How abrupt and dislocating the policy and regulatory response will be may depend on the progress capital markets can drive in the meantime.
About the Author:
Sara Anzinger is Senior Vice President of Capital Markets at Measurabl, the world’s most widely adopted ESG software platform for commercial real estate. Before joining Measurabl, Sara drove the development and implementation of Fitch Ratings’ Sustainable Finance initiative in the Americas, and served as Managing Director of Real Estate Debt and Fixed Income at GRESB. Sara has worked for Royal Bank of Canada and PNC Bank and spent much of her career in commercial real estate banking and structured finance. She holds a B.A. in Economics from Rollins College and an MSc in International Finance from the University of Amsterdam.