Environmental, Social and Governance Policy (ESG) may not crop up in most people’s daily conversations, but it is something which is relevant to all of us, in one way or another.
ESG looks at the question of sustainability and the ethical and social impact of any investment. Properties which are let to tenants who fall short of the ESG principles could have a lower valuation than other properties which have a high ESG rating. Companies can create value simply by increasing their ESG score.
The environmental criteria requires property investment and management to be responsible. The threat of climate change and otherenvironmental concerns mean that investors are tending to factor sustainability issues into their investment choices which in turn impacts on property values. Similarly, sustainability and environmental concerns over the depletion of resources and diminishing raw materials mean that the question of the obsolescence of a company’s product or service is now central to that company’s value. A long term view is becoming prevalent amongst investors.
When looking at the social criteria, diversity and human rights are paramount, with companies being assessed on such policies as slavery and child labour. Animal welfare will also be taken into account, whether in respect of the testing of products on animals or the welfare of animals bred for the food market.
When addressing corporate governance, investors will be looking into the management structure of a company and its employee relations. From diversity to corporate values, the valuation of a company will take account of how it manages and improves those relations.
Property developers and commercial landlords could all find themselves being tested as to their ESG rating - and for landlords, this could include the ratings of any tenants. As more pension funds look to ensure that their funds are being ethically invested so more and more lenders will be asking the same question - how ESG compliant are you?