04 | Will ESG fade as cost sensitivities rise?

ESG is having a rocky time. From the US to the UK and Europe, ESG is an increasingly hotly debated topic as globally businesses, NGOs and societies more broadly are seeking to hold governments to account whilst politicians are prioritising voter-pleasing policies over long-term systemic change.

Furthermore, we are seeing a reassessment of policies which is sending confusing signals to industry and slowing the transition to a greener economy, such as delaying the phasing out of gas boilers or shelving innovative green investment plans.

As the cost of business and living rises, politicians are looking for different ways to show commitment to net zero in the long term whilst delaying short term actions. All of this is against a backdrop of the warmest September globally on record and deeply concerning news that the world breached the 1.5 degrees temperature rise for more than a third of 2023 ¹.

A survey by Harvard Business Review showed 56% of European companies view ESG issues as opportunities. This compares to 30% of US based companies ². On the other hand, 34% of US companies perceive ESG issues as a risk factor compared to 13% of European companies. This highlights a growing chasm between the US and Continental Europe on green growth policies.

Whereas ESG feels like it’s lost its way in the political sphere, real estate investment in sustainability remains focused on addressing the climate emergency. This is evidenced by companies with more than $400 billion in AuM becoming signatories to the Better Building Partnership’s Climate Commitment ³. At Savills IM we recognise the short-term trade-offs and the difficult decisions the governments around the world are having to make, but we are not letting it influence our own commitment to ensuring that the assets we manage do not become obsolete.

This ambition stems from our belief that a company that puts sustainable investing at the heart of its business plan will be best placed to deliver robust long-term returns to investors. This is evidenced by the increasing focus on impact investment, with the Global Impact Investment Network estimating that $1.164 trillion is currently invested into impact products ⁴. That said, global real estate is worth c. $379 trillion, with less than 1% of that value invested currently into impact products ⁵. So can real estate catch up? Even if impact outcomes seem harder to achieve, it is abundantly clear that energy efficiency initiatives like insulation of homes, smart metering, or investing in making buildings climate resilient have clear economic advantages in the short and long term, regardless of policy shifts – lower energy bills being one of the most pronounced.

In addition, ensuring that wider sustainability considerations like good indoor air quality, focusing on biophilic design and access to quality green spaces, installing onsite renewables and embracing circular economy principles all help to position the asset as a quality building, which can support investor returns. As a company we are investing in upskilling our own people on sustainable investing outcomes through increasing resources, providing training on net zero implementation, integrating sustainable investment outcomes into variable employee remuneration, sponsoring system change programmes such as ULI’s C Change ⁶, co-chairing BBP’s Owner Occupier Forum ⁷ and inputting into the INREV ESG Committee ⁸. Can we afford to waver like politicians have been accused of doing? The simple answer is no, we need to keep our long-term targets in mind. But we need to be aware of practical implications when money is so tight for so many. We must keep focused on measures that can save occupiers money whilst improving buildings’ sustainability credentials. We are also upskilling our sector to have the skills needed to make buildings become sustainable in the widest sense, which inevitably will, despite the policy changes, lead us to prioritise adapting buildings to be resilient to the worst physical impacts of climate change and a net zero outcome.

Finally, we believe firmly that this challenge is a shared responsibility for all participants in our sector. Just as we should all eschew “greenwashing”, we should also not engage in “competitive greenification” with other investors in the sector. We are committed to sharing best practice and ensuring that problems are not just passed onto others or abandoned by selling brown assets or only acquiring green ones. Timing, however, is vital. We cannot expect best-in-class ESG expenditure to top the priority list during a cost of living crisis. But essential improvements that can improve cashflow and remove risk, such as improved energy efficiency, will understandably take priority.

Figure 4: The journey to a restorative future