The pandemic is heightening interest in the social part of ESG investments, as health and well-being will likely rise in importance to be on-par with climate change, say industry sources.
“In the short term, as COVID-19 turned into a pandemic and global crisis, there was perhaps a momentary distraction from certain elements of ESG, such as climate change, while it highlighted other elements, such as health and well-being,” says Sasha Njagulj, global head of ESG for CBRE Global Investors. “Longer term, this crisis highlights the overarching need for asset resilience, and climate change is too large of a challenge looming ahead to be forgotten for long. So, rather than distract from it, the health issues are elevating the overall concern over ESG risk in the medium and long term.”
Driven by the pandemic and the accompanying economic crisis, more commercial real estate companies are stepping up efforts to help both their tenants and their employees. For example, multifamily REIT Camden Property Trust established a $5 million resident relief fund for tenants struggling with financial losses caused by COVID-19. The fund is intended to help residents by providing financial assistance for living expenses like food, utilities, medical bills, insurance, childcare and transportation.
Industrial REIT Prologis donated 450,000 sq. ft. of rent-free distribution space in five markets to help charitable organizations with their seasonal and short-term storage and distribution needs through its Space for Good program. The company plans on making at least eight more donations of this kind in five additional markets.
Self-storage REIT Public Storage is raising its employees’ hourly wages by $3 through the second quarter, with the potential to continue the program into the future to help its property management staff deal with the crisis.
“We have seen the benefits of risk mitigation via best practices as it relates to environmental, social, and governance factors throughout this crisis,” says Uma Pattarkine, investment strategy analyst for CenterSquare Investment Management, a global investment management firm. “REITs have demonstrated some really fantastic social and governance best practices through this, while others have demonstrated that poor stewardship of these factors can result in heightened reputational risk and underperformance relative to the market.”
For example, on the negative side of the spectrum, hotel REIT Ashford Hospitality Trust ended up as the highest net recipient of funds from the Paycheck Protection Program, “soaking up many funds that were ear-marked for small businesses,” notes Pattarkine. The REIT then used part of the funds to pay preferred dividend payments to the company’s chairman, Monty Bennett, and his father, who received $2 million each. Ashford has since indicated it will return the money, but the damage to its reputation has been done.
In addition to demonstrating a clear misalignment of corporate and ESG interests, this caused a lot of social backlash for the company, as it’s been featured regularly in the media, resulted in the change of CEO, and has become one of the worst performers in the lodging REIT space this year, says Pattarkine.
“The focus on ESG stewardship, if anything, has been heightened by this crisis, which is testing our humanity and the humanity of the companies that operate around us,” says Pattarkine. “Socially responsible decisions, or lack thereof, from companies during this crisis will be in the minds of investors for a long time. This crisis is being monitored by investors and asset owners across the globe.”
According to Njagulj, an “investment performing well in ESG is not only resilient to [COVID-19] risks, but also offers opportunities to add value as the market focuses on these same issues.”
For example, when corporate workers start returning to the office, there is going to be a much bigger focus on providing healthy work environments, including better air quality and ventilation and more outdoor space, Pattarkine adds.
“Tenants have paid for nice space for recruiting, now they’ll pay for it because it’s safer.”