Now’s the Time to Act on ESG

Playing off the catch phrase “winter is coming,” popularized in the medieval fantasy drama Game of Thrones, senior living investors and operators should be warned that “ESG is coming.” 

That’s not a bad thing, however, according to a panel of experts at the 2022 NIC Fall Conference held last September in Washington, D.C. They discussed the growing importance of the Environmental, Social and Governance (ESG) framework in an educational session titled, “Calling All Capital Providers and Operators: What Senior Living Needs to Know About ESG.” 

Decision makers, capital sources and investors are embracing ESG as a new way to evaluate the impact of business strategies on employees, consumers, and the global community. Likewise, senior living providers need to understand ESG and why it’s important.  

“It’s best to start now,” advised panelist Greg MacKinnon, who used the Game of Thrones analogy. He is director of research at the Pension Real Estate Association (PREA), which provides information and research to the institutional investment community.  

Panel moderator Isela Rosales kicked off the well-attended session. “Where to begin?” asked Rosales, managing director and head of ESG & Sustainability at Bridge Investment Group.  

The panelists agreed on some basic definitions. Environmental covers the physical aspects of the building, such as lighting, energy usage, emissions and sustainability initiatives. Social includes factors that impact residents, employees, and the wider community. Governance involves transparent management and accountability to various stakeholders. 

ESG is a differentiator at investment management firm Harrison Street, according to panelist Jill Brosig, managing director and chief impact officer at the firm. Like other senior housing investors, Harrison Street focused first on the environmental aspects of ESG. Practical solutions around energy efficiency, for example, are relatively easy to quantify.  

But Harrison Street has since moved into the social impacts of the ESG framework. “It's not just a feel good thing,” said Brosig. “The product performs better from a financial perspective.” 

MacKinnon added that ESG is not about being an “environmental warrior.” Instead, ESG incorporates factors into decision-making on what properties to acquire and where to invest CapEx for better returns. “It’s about dollars and cents,” he said. 

As an operator with 35,000 employees, Brookdale groups its associates under the “social” label, according to panelist Kathy MacDonald, senior vice president of investor relations at the company. Diversity, equity, and inclusion (DEI) initiatives at Brookdale also fit under the social category. 

ESG Evolution 

Like other acronym-laden frameworks, ESG continues to add new letters. Some businesses are attaching an “R” for “resiliency.” Investors, for example, want to know how resilient buildings are to climate risk.  

After recurring floods and wild fires, Harrison Street found its stakeholders were concerned about the risk of sea level rise, storms and heat waves. The firm now analyzes buildings from a resiliency standpoint as far out as two investment hold periods to determine if mitigation is needed. “It’s a huge issue now,” said Brosig.  

Canadian and European investors are about 10 years ahead of their U.S. counterparts on ESG. “U.S. investors are trying to figure out what to require from their partners,” said MacKinnon.  

Investors are giving U.S. property owners and operators some leeway for now, the panelists said. But institutional investors expect to see a commitment to ESG and some progress toward implementing the framework.

Measuring and reporting on ESG initiatives is key. Harrison Street published a climate action plan. The 2025 target is to reduce carbon emissions by 70%. An impact dashboard is updated every quarter. “It’s a lot of work, but it’s important to be transparent,” said Brosig.     

The emerging standard of institutional investors is the Global Real Estate Sustainability Benchmark (GRESB). It assesses ESG performance of real estate assets globally. 

The Pension Real Estate Association developed a user-friendly web-based list of key performance ESG indicators. “It’s a good roadmap of where to start and what to measure,” said MacKinnon.  

Sound overwhelming? The panelists noted that consultants can be helpful to start the ESG process. Harrison Street at first relied on consultants to help with strategy. Now the company has an ESG team, though a consultant helps with the GRESB submissions.  

Still early in its ESG journey, Brookdale decided what to measure and in-house departments then did the work. Human resources, for example, focuses on the social aspects while legal counsel handles governance. The accounting department fact checks the data.  

Brookdale’s human resources department has also incorporated DEI elements into its recruiting practices. “We spend more time on development and retention of associates,” said MacDonald.  

The panelists discussed the value of various healthy building certifications. They agreed that it can help to differentiate a property and also attract employees and residents. Also, older buildings may be eligible for so-called “green” financing programs at low interest rates to improve energy efficiency. “It saves money,” said Brookdale’s MacDonald. 

Healthy buildings, such as those with a Fitwel or LEED certification, can command higher rents, according to PREA’s MacKinnon. There’s a growing realization that adhering to healthy building standards is not only better for tenants but also for the next buyer. “You have to worry about the next buyer who will look at the building’s environmental credentials,” said MacKinnon.  

Where is ESG headed in the next 5-10 years? 

Expect more regulations, especially at the municipal level. Investor interest in ESG will only continue to grow. “Get ahead of it now,” advised MacKinnon. “ESG is coming.”