The beginner's guide: Demystifying ESG with Spaceflow and JLL
In 2022, portfolio and asset ESG is at the top of mind for many of our partners. Measurement of Environment, Social, and Governance factors is top of mind for our team as well, thanks to our recent introduction of FLOW Smart Metering functionality on our platform. But while everyone is thinking about ESG, there are still a million questions swirling around that lack simple, compelling answers. Why is ESG even worth tracking? Where to begin, and what pitfalls to avoid?
We addressed these exact questions in our LinkedIn Live event Demystifying ESG. Ondrej Vodnansky, our business development manager responsible for CEE, Benelux and the Nordics, spoke with Steffen Walvius, JLL’s new head of sustainability services for CEE. Steffen gave a number of useful insights on how important ESG really is, and what to do to start tracking it.
Demystifying ESG: Live conversation with JLL
Is ESG really worth investing in?
First up, one concern some real estate firms voice is that paying attention to ESG could just be a passing phenomenon, a fad that will eventually lose relevance.
Firms that are concerned about this are understandably hesitant to invest in ESG improvement across their portfolios. But real estate owners should not base their future ESG plans on the carrots and sticks that have been used by governments so far. According to Steffen, at least in the most countries of Europe, “From a regulation point of view there has not been a very big impact up until now, so you could still go about the way you did for the last 10 years…but between 2023 and 2030, legislation is increasing a lot from the EU. It’s not a bandwagon at all any more.” Real estate businesses would be well-served to prepare for a future where ESG is strongly emphasized by governments around the world, rather than the laggardly world of current regulations.
It’s more than just government regulations that matter here, though. Occupiers increasingly track ESG themselves, for one thing. Also, we are operating in a very competitive labor market, and according to Steffen, prospective employees can be swayed in their decision on where to work based on what the firm is doing to take care of the environment.
Similarly, investors are increasingly putting their money into investments that match their priorities. If ESG criteria are part of those priorities, they won't finance projects without clear ESG goals, either. “The green certificate won't be a marketing benefit that much, but in fact, some tenants from the corporate companies won't even sign the lease,” said Josef Stanko, analytic at Colliers.
“Banks evaluate green projects and sustainability, and based on that criteria, can offer better rates,” said Lenka Matejickova of Arcadis.
Steffen explained that “Investors will bid on assets but have assumptions, saying ‘we expect this building will be class-A when it comes to energy efficiency, we expect it will comply with the EU taxonomy,’ and that impacts the value but to a bigger extent the liquidity of the asset.” Steffen added that it’s more than just the “E” in ESG that investors track, and that sometimes, investors won’t buy buildings with tenants in certain industries, like weapons manufacturing.
"Investors will bid on assets but have assumptions, saying ‘we expect this building will be class-A when it comes to energy efficiency, we expect it will comply with the EU taxonomy,’ and that impacts the value but to a bigger extent the liquidity of the asset."
With all that said, it is clear that ESG has a lot of inherent merit. Whether it is worth investing in for individual real estate firms depends on their particular niche and location, but odds are, most real estate firms will be tracking these metrics in the future.
What does an ESG plan rollout look like?
Every property company that really wants to take ESG seriously should develop its own unique ESG plan at the corporate level, not just the property level. That plan will likely wind up having a handful of specific steps, all necessary, to maximize ESG benefits.
“First you have to understand carbon emissions, to know how much carbon you emit,” Steffen said. “Data is very important. Then, you maximize operational efficiency, you look at systems like HVAC inside the building to tweak that and make sure they are working optimally. Then you get to the retrofit.” Only in the retrofit stage do you begin making expensive improvements. Many of them will likely target lighting and heating, since LED lighting is straightforward to implement and heating is a major energy sink for most buildings.
Sustainability improvements reduce operating expenses for occupiers, too, but frequently it is landlords that are solely on the hook to pay for them. This represents a misalignment that can prove costly for property owners, and consequently reduce the likelihood of investing in ESG improvements. There are, however, ways to bring the interests and expenses of owners and occupiers into better alignment. One critical tool here is the green lease.
Steffen explained that “A green lease is nothing more than a lease agreement with ‘green clauses’ that say something about having to share data, separate waste, or other things.” They can be extremely useful because in many cases the landlord needs the tenant to track energy data themselves to provide a comprehensive picture of building energy use.
In addition to tracking data, one particularly useful green lease clause Steffen mentioned focuses on sharing the costs of building improvements that wind up reducing operating expenses for the occupier. For example, “If the landlord invests money in the building, and it reduces operating costs [to the tenant] by one Euro, he could theoretically increase the rent by one Euro, Steffen said. “But it never happens one-to-one, and you have to be able to prove that the measure reduces operational costs for the tenant.” While green leases are powerful tools landlords should consider using if they plan to make ESG a real priority, they take time and effort to plan and implement.
ESG isn’t going anywhere, and we hope that our conversation with Steffen helped answer some questions about whether ESG is important and how to start measuring it. Would you like to see future LinkedIn Live content about ESG? What other subjects would you like us to cover? Let us know!