The commercial real estate industry has had a heightened focus on Environmental, Social and Governance (ESG) initiatives over the last few decades. The COVID-19 pandemic and other global challenges over the last two years have only accelerated that focus on ESG. According to a 2021 trends report issued by PwC US and the Urban Land Institute, 82% of respondents consider ESG elements when making operational or investment real estate decisions. I decided to ask three CEOs in the commercial real estate industry about their commitment to ESG initiatives and why it’s important. The CEOs are:
· Sonny Kalsi, co-CEO of BentallGreenOak – A global commercial real estate investment platform that is leading the charge on ESG performance and sustainable investing.
· Sara Armbruster, CEO of Steelcase – A global provider of architecture, furniture, and technology solutions to create places that help people work better, be inspired and accomplish more.
· Joe Derhake, PE, CEO of Partner Engineering and Science, Inc. – The top consulting firm helping CRE firms improve asset performance through engineering, energy, and environmental services.
Reiss: Have the last two years (with social justice, climate change and the COVID-19 pandemic taking center stage) prompted you to prioritize ESG differently? If so, how?
Sonny Kalsi: The last two years have only served to validate our thesis about ESG in the built environment that we’ve held for the past 10 years. We have long been on a path towards aggressively addressing our environmental footprint, deepening our connection to social causes and movements, and contributing to global efforts to establish more responsible governance frameworks for our industry. Although climate change is now in the mainstream, we understand the long-term value that comes from managing assets with lower carbon emissions and higher energy efficiency to reduce operating costs and drive profitability.
Following the last two years, we are evolving and intensifying our efforts to accelerate data enablement programs to deliver against our firm’s ever-expanding ESG commitment. We are looking at our people and talent more closely today in terms of the diversity of backgrounds and lived experiences to make better informed decisions. We are also putting the support structures in place for a more diverse workforce so that they are better cared for, served and empowered to achieve their highest potential. We are expanding our relationships with the tech community so that our access to proptech can better support environment and social performance at the asset level. We are also thinking about health and wellness in new ways, including greater attention to mental health and viral spread mitigation strategies for current and future infectious disease events.
Sara Armbruster: The global pandemic has fundamentally changed how we live, learn and work. We’re proud that Steelcase has a long history of prioritizing ESG with sustainability efforts and diversity initiatives, including being one of the leaders in adopting same-sex partner benefits. That said, the last two years have reinforced the urgency of our work and why ESG is a key pillar of our corporate strategy. In a period of heightened social unrest due to COVID-19 and racial inequalities, Steelcase’s Social Innovation work has been essential to our engagement with communities as we partner on interventions to meet basic needs while addressing and advocating for systemic change in our business and communities. The pandemic presented a unique opportunity to deepen our longstanding commitment to employee wellbeing. We supported our employees through the disruption with enhanced wellbeing services, including daily mindfulness sessions, virtual group exercise classes, free 24-hour virtual life coaching and a workshop series focused on mental health topics.
Joe Derhake: As a strategic partner to the commercial real estate (CRE) industry, we have seen a sea change in the last two years. We and our subsidiary Partner Energy have been beating the energy efficiency drum for more than 10 years – in some ways ESG is just a different name for what we’ve been doing all along. In the past, real estate firms have been somewhat slow to buy into energy efficiency improvements. That has changed – it is now top of mind for our clients. For CRE firms that are raising funds to buy real estate, ESG has become critically important because some of their investors are demanding it. CRE firms that don’t perform well on ESG are less competitive in fundraising, which is why more than half of the top 20 private equity firms have tapped us to help them hone their ESG strategy. We approach this through property-specific ESG data collection, benchmarking, goal setting, and decarbonization measures. We expect this area to see substantial growth in the coming years.
Reiss: The real estate industry makes up 49% of global carbon emissions. What are you doing to reduce your carbon footprint? What does the CRE industry need to do as a whole to make a meaningful impact?
Kalsi: The wave of net zero commitments in our industry is spurring a lot of conversation around collaboration, and the establishment of ESG reporting standards and best practices. This collaboration is vital to each of us individually and collectively achieving this goal.
Our present actions continue to focus on driving operational efficiencies that target water and energy consumption, waste production, and advancements on the use of new technologies and systems that help us shrink our footprint wherever possible. Since making our own net zero commitment, we have started down a course of evaluating each of our assets to determine the short, medium- and long-term reforms we’ll need to make to achieve vast reductions of carbon emissions. Our ESG assessment capabilities are directly informing the acquisitions and dispositions that we make so we are making future-proof decisions in the present day. Even our development teams are looking more closely at the materials we use and reuse to help drive down embedded carbon.
Armbruster: We recently set science-based targets to reduce our emissions by 50% on a 1.5°C pathway by 2030, we are carbon neutral in our operations, and we have purchased renewable energy equivalent to 100% of our global electricity usage. This is on top of reducing our direct emissions by 34% over the last decade. We also know our impact extends well beyond our organization, so we are partnering with our suppliers to set their own science-based targets by 2025 and help them reduce their greenhouse gas emissions.
We believe those within the CRE industry can increase and accelerate their impact by engaging with partners who are willing to collectively address the problem. We are seeing this within our supply chain and among our customers, particularly those who are also setting science-based targets.
Derhake: There is tremendous opportunity for the CRE industry to reduce its carbon footprint. We are focused on the projects that both reduce carbon emissions and provide a meaningful return on investment, usually in the form of reduced energy costs or renewable energy generation. Here are projects that every CRE owner should consider:
· A simple lighting retrofit—changing incandescent to LED—typically has a payback period of 3-5 years
· Modernizing heating & cooling systems
· Building automation controls
· Retro commissioning – optimizing the systems and equipment of existing buildings
· If you have a big roof, car ports, or a lot of land, you should consider solar – it is much more cost effective than it used to be
Reiss: Are there any new ESG initiatives you’ve launched or recent milestones you’ve met that can help other CRE companies add more structure and accountability to their ESG goals?
Kalsi: Our most recent commitment is to achieve net zero carbon emissions by no later than 2050. As signatories to the Net Zero Asset Managers commitment, we’ve added another layer of accountability with a series of public commitments that include near-term interim targets for carbon reduction and the alignment of our investment strategies to achieve a net zero goal. Additionally, our U.S. core strategy is one of the first U.S.-based open-end, diversified, core real estate funds to become an impact fund. We’ve made bold new diversity commitments to achieve gender parity by 2030 and enhanced Black executive representation by 2025.
Armbruster: When considering sustainability in CRE, many only think about the physical structures and overlook products and materials within the space that wind up in landfills. Last year we launched a mesh office chair designed with sustainable materials and the lowest number of components necessary. Steelcase Karman weighs only 29 pounds – 33% less than other mesh chairs.
To create a healthy culture, we’ve added layers of accountability to our own progress and we have linked our diversity, equity and inclusion (DEI) and ESG performance to executive compensation.
Derhake: The ESG space is rapidly evolving, and we are now including considerations for Resiliency. To score well on Resiliency, owners can engineer their buildings to be ready for floods, storms, and fires. To score well on Environmental, they can reduce the carbon footprint of their assets.
We are helping clients evaluate these risks and opportunities before they make an investment as well as for the assets they already own. This is new to how real estate is transacted and managed. Many firms have no idea where to start, so we are creating a process and program for them to incorporate ESG considerations throughout the real estate lifecycle: due diligence, asset management, and disposition.