Environmental, social, and governance (ESG) risks and opportunities are increasingly important to real estate organizations for a variety of reasons. In this article, we will explore why ESG matters to real estate organizations and how they can integrate these considerations into their operations.
What is ESG?
First, it's important to understand what ESG means. ESG is a risk framework that began years ago when financial institutions began to realize that traditional financial risk models that assessed balance sheets and P/L statements, for example, did not accurately assess long-term risks. They were mere short-term snapshots of a company’s outlook. In recent times with political polarization occurring throughout the world, but especially in the U.S., there came a realization that financial institutions needed to help stave off systemic risks through what is now known as ESG. In a nutshell, it is the private market’s response to managing long-term risks and better assessing long-term financial performance.
How is ESG performance measured?
ESG risk analysis is conducted through the lens of considering long-term environmental, societal, and governance risks. To help investors, underwriters, and lenders make these assessments, there are ESG performance standards and ESG ratings agencies that aid in standardizing a company’s performance outlook on E, S, and G risk factors, which vary in financial materiality depending on the industry.
Generally speaking,
• Environmental risks relate to a company's impact on the natural world and the natural world’s impact on a company.
• Social risks refer to a company's impact on its employees, customers, and the broader community.
• Governance risk factors refer to a company's quality risk controls, strategy, transparency, and ethical practices.
Why does ESG matter to real estate organizations?
1. Increased stakeholder demand: Many real estate organizations are facing increased demand from stakeholders, including clients, employees, and investors, to consider ESG risks and opportunities. This demand is driven by a growing awareness of the impact of business on people and the planet and vice versa.
2. Improved brand reputation: By integrating ESG considerations, real estate organizations can improve their brand reputation and differentiate themselves from competitors. This can lead to increased business and a stronger overall brand.
3. Enhanced financial performance: Research has shown that companies with strong ESG practices tend to have better financial performance in the long term. This is because ESG considerations can lead to cost savings, increased efficiency, and reduced risk.
4. Legal and regulatory requirements: In some cases, real estate organizations may be required to consider ESG as part of their practice due to legal and regulatory requirements. For example, real estate agents may be required to disclose certain environmental or social information about properties they are selling.
In conclusion, ESG is increasingly important to real estate organizations for a variety of reasons. By integrating these considerations into their work, they can improve their brand reputation, enhance financial performance, and meet legal and regulatory requirements. There are many ways for ESG considerations to be integrated into their operations, including educating clients on ESG, promoting sustainable properties, implementing sustainable business and governance practices, and disclosing publicly how they are managing ESG risks and opportunities.
Victor launched an ESG Risk Rating self-assessment tool to help policyholders assess their organizations against internationally-recognized ESG performance standards and frameworks. The tool is an excellent first-step to understanding ESG risks and opportunities, and provides policyholders with an ESG rating.
If you have any questions, please email esgriskrating.us@victorinsurance.com.
