Why Do Investors Care About ESG?

Over the past few years, ESG reporting has gained increasing traction. This is due, in part, to the climate change crisis and the amount of emissions emitted by the built space.

What does ESG mean? Find out here.

So, why do investors care?

Well, simply put, it makes good business sense. ESG analysis can have a huge impact on financial metrics and risk reduction. Insights can help to inform investment decisions and future-proof portfolios.

Companies that prioritise ESG tend to have higher financial growth, lower volatility, higher employee productivity, reduced regulatory and legal interventions (fines and sanctions), top-line growth, and cost reductions (PlanA).

European regulations are encouraging the implementation of ESG factors initially within the financial sector, but soon this will also include all other sectors. It supports green initiatives and aims to create a more sustainable economy that is decarbonised and less wasteful. Learn more about transitioning to a circular economy here.

Pressure to implement this framework comes from multiple stakeholders, including legislators, investors, customers, tenants and the media. It is increasingly becoming a factor that is considered when leasing a building because people are now more aware of their personal responsibility when it comes to tackling climate change, and they want to work/live in a building that is efficient and healthy.

Social factors have increased in popularity since the COVID-19 pandemic; factors such as air quality, lighting, personalised control, automation and more have a huge impact on mood, productivity and wellbeing. Hence, in recent times building upgrades have prioritised these factors, ensuring spaces are where occupants want to spend time and are willing to pay a premium for.

“49% of millennial millionaires make their investments based on social factors. Therefore, it is essential for VCs, startups and tech companies to anticipate the law” (PlanA).

Insights gained during conversations

We spoke with Paul Reid, who is the Business Development Manager at Onnec, on our podcast about how ESG is impacting the industry. Listen to the podcast here. He states:

“The legislation is going to get tougher and tougher, and that's likely to be the case because all the early indications show that, as a country, we're probably going to miss a lot of the net zero targets and commitments. This then starts to become a financial and a business model problem because the less credible your net zero pathway and strategy are, the less favourable you will look to investors or tenants wanting to rent a space.

So, it’s a massive financial and business risk for these companies, and decisions have to be made around priorities in their investment portfolio because it's likely that they may not be enough available capital to upgrade the entire portfolio in one go”.

We also spoke with Glen Schrank, CEO of Phoenix Energy Technologies, about why stakeholders care about ESG; you can listen here.

He believes that “the benefit of recognizing the link between cost of capital and ESG processes results in improved company performance, including financial reporting and reduced risk.

Another challenge is balancing the need for return on investment and payback on ESG initiatives in the current environment. Energy costs have increased exponentially in some parts of the world, and supply chain costs are increasing at an accelerated rate. Therefore, cost has become an even bigger driver. Implementing ESG best practices is an investment, but it allows costs to be saved in the long run and stops energy waste”.