Standard ESG Strategies Neglect the Social Component
EU Taxonomy, Sustainable Finance Disclosure Regulation (OffV) and CRREM pathway – these are just some of the regulations that were introduced to implement the sustainability principles of the United Nations (UNPRI) in the real estate industry.
An ESG strategy therefore represents a core component in the strategy papers of market operators. In addition, European investors, more so than others, attach increasing importance to the compliance with ESG criteria.
A whole range of ratings was developed for measuring the degree to which the targets have been achieved. A neat overview of them is provided by a survey that PRI, INREV and ULI jointly compiled under the title “Mapping ESG – A Landscape Review of Certifications, Reporting Frameworks and Practices.”
It screened the systems commonly used around the world and compared the most common analyses. It is striking, but not surprising, that most methods analyse environmental sustainability (E). Corporate governance (G) is also analysed somewhat less frequently. The evaluation of social aspects (S) has so far led a niche existence.
The “S” in ESG is barely acknowledged, but can be of great value in gaining and retaining talent.
While environmental and governance aspects are easy to describe and assess, the social angle is comparatively complex. Components relating to the human factor at the (logistics) workplace are of complex nature. They refer to:
- the interior qualities of the warehouse, e. g. the common areas such as break rooms or cafeterias
- the micro-environment, meaning essentially the site itself
- the meso-environment, possibly the trading estate or industrial zone where the logistics property is located
Exhibit 1: Cover of the “Mapping ESG” comparative survey compiled by PRI, INREV and ULI
Efforts to enhance the social quality of logistics warehouse interiors have already been made.
Enhancing the wellbeing of workers through building features is one of the core elements of ESG principles. In some asset classes, e. g. office and residential, some actual standards or approaches have been introduced, such as the “Wellbeing” certificate. For logistics real estate, by contrast, these standards have only been vaguely defined. But there are a number of options for elevating the social standards. Potential angles include occupational health and safety measures to reduce physical strain or in-house options for socialising so as to make up for the peripheral location of the properties when compared to office venues, for instance. However, the specific needs of logistics workers have not yet been as transparently defined as is the case with other professions. Of course, dedicated ESG requirements do exist, but the applicable standards may aim for a higher level than is actually needed.
Among the aspects that, even today, are often implemented to enhance the social quality of warehouse interiors are the following:
- staff rooms including showers and dining area
- lighting concepts for the office areas that rely on natural light
- lighting design (LED) based on natural light and motion-detection in the warehouse areas
Outdoor areas may also be optimised for high social quality
Upgrading the quality of stay in and around the warehouse can enhance the wellbeing of staff working in logistics properties. These may not always be measures intended directly for people.
After all, the quality of stay is also indirectly enhanced by environmental measures. Here, typical features include:
- environmental valorisation, e. g. by installing habitats for insects in stone walls, insect hotels, bird nesting boxes, wild flower meadows, etc.
- ponds/soakaways to create a biotope and to add rainwater to the water table
- break areas in greened outdoor settings, including seating and solar shading
- roofed-over bicycle parking spaces with charge points
- EV charging stations
- enhancing the wellbeing factor by using wood and glass for an attractive façade design
All these measures will enhance the quality of stay even if there are still no standardised measurable factors for this.
Methodological approach for a tool to rate the supply ratio quality of a given environment.
Aside from the actual logistics centres and their immediate surroundings, the quality of a location is also defined by the greater area around the warehouse. The intrinsic value of a workplace is measured in terms of diversity, quality and accessibility of amenities that enhance the wellbeing of the staff. For one thing, the commute to work tends to be longer than for other working professionals due to the often peripheral location of logistics centres in trading estates and industrial zones. Moreover, logistics workers often work in shifts, which creates further drawbacks. To ensure the long-term sustainability of an investment, it is therefore of the essence to determine the factors that remain (almost) permanently unchanged. Among these are the access to public transportation and amenities serving day-to-day needs – e. g. including lunch counters or restaurants/food takeaways/cafeterias. Equally important are grocery stores, drug stores or childcare so as to ensure that logistics workers enjoy a socially equitable work-life balance.
The aspects above exemplify but a few of the components that are suitable for determining social sustainability. It is important to quantify them in plausible ways rather than using subjective assessments. This is particularly important if the checks are to be repeated on a regular basis. Of course, these factors are not subject to major and frequent changes. But in the course of a typical investment cycle, new infrastructure may be created. New retail amenities may be added or existing ones go out of business. Real estate locations that had a high social site quality at the time of acquisition may see their quality level slowly and incrementally deteriorate over time. This makes it important to develop strategies to address the issue ahead of time. Suitable geo-data and evaluation systems make this a quick and easy thing to do these days – assuming you have the necessary know-how. A common approach to quantifying social aspects is to measure the quantity and quality of the amenities located within walking distance of a given logistics warehouse. Next, an assessment scheme is used to derive a rating that is not distorted by any subjective observation.
A comprehensive ESG strategy deliberately integrates social factors.
Perhaps one of the reasons why many investors have refrained from prioritising the social site component so far is that there are barely any relevant measurement approaches. But disregarding the factor can turn out to be a disadvantage because any comprehensive ESG strategy deliberately includes the social component. In the case of logistics real estate, this establishes necessarily the site quality against the background of staff wellbeing – especially in light of the increasingly ominous shortage of skilled labour.
In response to the mentioned lack of suitable approaches, GARBE and other market operators are making a joint effort to assist the German Society of Property Researchers (gif) in the definition of a methodological standard. At the same time, the approaches are already being tested and developed using in-house tools.
Please click to enlarge.
Exhibit 2: One solution for a data-based tool for measuring the social component of logistics sites within the scope of a comprehensive ESG strategy, currently under development
