On a superficial level, this is not a particularly difficult question to answer. After all, every brand already knows what the market expects: an enthusiastic and positive response. Otherwise, a brand runs the risk of damaging its credibility, perhaps irreparably. Sustainability strengthens a brand’s reputation and image. As a result, it also boosts growth and earnings. Overall, sustainability certainly has a positive impact. In fact, we could probably stop there, because this is the short version of why sustainability is fundamentally a good thing and “ultimately pays off”. But at this point it also becomes clear that there can be no easy answer, because easy answers are far too simplistic to be of much value. Just ask yourself: Can you think of a company that has discovered “sustainability” in the last 10 years and, in the original economic sense, has used sustainability to earn money, serve society, reduce CO2 emissions and create added value? You’re probably thinking that it is not entirely fair to include so many variables, but the question would certainly prompt an exciting, albeit endless, discussion.
But let’s look back at how companies have used the term “sustainably to position themselves over the last 10 years. Starting with Green Buildings and sustainability certificates, the real estate industry in particular has begun a journey into the positivity-charged unknown. And yes, trend-setting investors, consultants and developers have been able to leave their mark and have succeeded in distinguishing the worthwhile from the worthless. In a parallel development, leading brands have increasingly developed an awareness of how they should best act as employers to position and communicate the purpose and unique value propositions of their companies. A diverse range of stakeholders want to know which companies stand firm behind their statements and product promise, what drives them, how they deal with their customers and employees, and what ethical positions they credibly represent. It has become increasingly apparent that brands can successfully combine profitability and sustainability.
Now, having only recently set out on the Corporate Social Responsibility (CSR) journey, we have a slightly different destination in our sights. As the new decade gathers speed, it is environmental, social and governance (ESG) that have become the three standard criteria for measuring the sustainability of an investment or company in the real estate industry. Both investors and companies are increasingly adopting ESG criteria, especially when it comes to real estate investments. The three pillars offer a broad and diverse range of opportunities to enhance long-term financial performance, mitigate risk and create valuable competitive advantages.
While much of CSR remained vague and foggy, ESG criteria have created a broad range of sustainability ratings and rankings, each of which serves to measure the sustainability of investments and form the basis for evaluating investment assets. Investors are already benefiting because they can use the collection, compilation, aggregation and evaluation of ESG data to underpin more dependable assessments of potential investment assets. Put more simply, the risks associated with an investment are reduced – and that is precisely what the – non-grey – capital market likes.
Even more importantly, sustainability has made it into peoples’ consciousnesses and to the top of the German government’s Agenda 2020 plans. Nevertheless, there is a big gap between a shift in awareness and tangible results. And it probably won’t be quick, or easy, to bridge this gap. Thus, despite the fact that goals are defined politically, e.g. “the 2°C limit”, there is still a long and heated discussion to be held on the specific ways and means of achieving them. And without a blueprint for action, huge upfront investment (in business speak “costs in €”) is required, without the security of knowing that this will be matched by “earnings in €” in the short to medium term. In practical terms, however, I believe that negative screening will be the determining factor in shaping our discussions and actions, at least for the time being. We need to focus on investments that can, should or must no longer be made – depending on their structure. But why, you might well ask, should we adopt this rather negative attitude, given such a positive best-case scenario? So far, there is nowhere near enough “sustainable” product, whether we’re talking about cars, real estate or anything else. Supply shortages lead to price premiums and drive potential customers away from the market. One potential solution is to introduce subsidies, or at least a “green premium”, which is the economic equivalent of saying “it’s worth it”.
Staying true to script and in response to the almost daily pressure to “finally do something”, the real estate industry has found itself increasingly talking about “impact investing” or “social impact investing”. These terms refer to investments that are primarily designed to meet social needs with the explicit expectation of achieving measurable social and financial returns. The principle of social impact investing as a means to an end is relatively simple, yet in today’s real estate market it remains a niche investment. At present, it is only really extremely wealthy private individuals that have embraced the concept of social impact investing, although a number of foundations have also expressed interest. The impact investing approach is particularly suited to investors who want to combine investing in good causes with adequate investment returns. On the one hand, this has a positive impact on their investment portfolios and the market values their companies. On the other hand, financial resources are deployed to combat social issues, with a positive impact on both society and the environment. And this allows asset owners to achieve strong returns, especially in times of crisis. And there are so many alternative asset classes that can be used to expand the traditional business models of real estate funds. As an asset class, social real estate, for example, offers a host of fundamentally attractive investment opportunities, including hospitals, senior care facilities, assisted living, sheltered housing for the disabled, daycare centres, schools, student housing, cultural venues and educational institutions.
Despite such positive and dynamic developments, there is still a lack of what is probably a manager’s favourite control and decision-making tool: measurability, i.e. a valid data basis and benchmark comparisons with competitors. Clearly, sustainability has an extremely important role to play in the medium- to long-term performance of corporations and brands. What has already been achieved in terms of brand positioning, i.e. direct comparison with competitors, will also be achieved in terms of economic performance. At which point the real estate industry’s current avant-gardists will be joined by the broad masses of the market. After all, as we’ll all know by then, it’s worth it!