Although the concept has been part of the corporate conversation since the mid-20th century, recent developments, situations and milestones have made investments in sustainability a topic that is more alive today than ever.
The climate crisis that has touched almost every country, the impact of the COVID-19 pandemic, new generations entering the workplace (generations more vocal than ever), and EU legislation requiring ESG reporting for all firms marketing in Europe—all lead us to the point where we have to accept that it’s time the Private Equity and Real Estate sector (PERE) incorporates sustainable investment criteria into its day-to-day business.
And while 85% of individual investors are concerned about incorporating sustainability criteria in their investments, this figure rises to 95% when it comes to Millennials, according to data from Morgan Stanley. By 2030, the first Millennials will be reaching age fifty, and moving into positions of corporate responsibility and impact.
In other words: there is no excuse for ignoring ESG criteria.
ESG stands for Environmental, Social and corporate Governance and it incorporates many different variables to evaluate the sustainability of an investment. These variables go far beyond the viability of the business or expected profit. ESG is, above all, multi-faceted, multi-environmental and multi-dimensional. It encompasses all kinds of factors: waste, pollution, emissions, energy use, human talent management, diversity, well-being, management practices, governance, tax strategies, etc. To evaluate ESG is to take a holistic view.
Its impact is such that ESG is a driver for more than ten of the Sustainable Development Goals (SDGs).
Why are ESG criteria important when it comes to PERE investments?
- ESG thinking takes into account the local, global and human impact of each investment.
- ESG thinks long term, beyond the end of an investment period.
- ESG thinking ensures the sustainability of investments.
- ESG can guide you to make more efficient investments.
- ESG considers the entire value chain and society as a whole, going far beyond the shareholder or stakeholder.
- ESG criteria is a constant indicator; it forces us to never let our guard down.
- And, believe it or not, ESG has an impact on investment and asset value.
There is another aspect important to highlight: those who implement ESG investment strategies will be in a highly competitive position. Or, to put it simply: not having ESG criteria will see you not being competitive. Having an excellent ESG rating can go a long way with your investors, possible investments, and your brand reputation.
Developing investment practices using ESG principles requires, above all, a shared responsibility and a strategic vision that helps us leave no one and nothing behind.
In the Real Estate sector in particular, there is a tendency to place emphasis only on environmental criteria and leave aside the social or corporate governance aspects.
A comprehensive ESG strategy should cover all points from E to G, and should be considered throughout the investment process and at every point in the internal and organizational structure. It must be something taken into account in the investment decision making itself, but also in the screening process, during due diligence, during the management of the structure and, of course, when divesting.
ESG must be everywhere, starting with the Boards of Directors and permeating the entire structure of the fund, including all the different actors present in the operations. In the same way, ESG must be verbalized and present in the ethical codes and internal policies that govern your activities, as well as being included in strategic planning. ESG criteria can also act as measurable, actionable and corrective indicators of activity—ready-made KPIs.
ESG can also be an essential lever to tackle many of the challenges we face and will face in a post-COVID world: from how to create more humane cities which will, no doubt, become progressively larger and more inhabited; to considerations around the gradual aging of the population; the threatening lack of certain resources; and the new lifestyles we will adopt as a result of technological developments, such as autonomous transport or AI.
When considering your new ESG policies, here are some points to remember:
- Take into account Social and Governance criteria, not only Environmental ones.
- ESG provides a more transparent and consistent reporting system than annual reporting.
- ESG policies should be present horizontally and
- Incorporate all stakeholders with a part in the investment process.
- Go further and open the conversation outside the investment itself—you never know where a committed discussion may lead.
- ESG policies should be strongly supported by Boards and/or Investment Committees.
The EU is, we believe, only the first to legislate for ESG Reporting. We believe other countries will follow, and soon. ESG won’t be going away.
Turn over a new leaf. Get your ESG sorted.
If you want to know more about ESG policies, reporting options and more, there’s lots of information out there, but here are some good places to start:
Local Knowledge – International Coverage
Founded in 1979, Auxadi is a family-owned business working for multinational corporations, private equity funds and real estate funds. It’s the leading firm in international accounting, tax compliance and payroll services management connecting Europe and the Americas with the rest of the world, offering services in 50 countries. Its client list includes many of the top 100 PERE companies. Headquartered in Madrid, with offices in US and further 22 international subsidiaries, Auxadi serves 1,500+ SPVs across 50 jurisdictions.