Governance Could Be Transformational In ESG If CRE Learned To Take It Seriously

Governance is the unplucked third string of the ESG trio.

Without proper governance, property’s good ESG intentions become mere empty noise, publicity stunts with no value, and no capacity to create change.

Bisnow asked about the lessons learned regarding doing business in Russia following its invasion of Ukraine. This is what the experts told us.

Just Making A Noise

Last month many of the big surveying and property businesses decided to stop doing business in Russia. A flurry of press statements suggested the reputational cost of staying in Moscow or St Petersburg was simply too high.

A good day for the governance wing of ESG (environmental, social and governance)? You might think so. After all, these firms pulled out of a country whose invasion of Ukraine means its values are hard to support.

But was the pullout less a sign of good governance, but the reverse? Did it reveal that many of these businesses had no clear view of where, ethically speaking, they ought to do business, when and with whom? Because if they had such a clear view, they would surely have pulled out in a more orderly fashion some time ago?

According to some ESG experts, the latter view may be closer to the truth.

“This may not have been a straightforward decision,” Knight Frank head of ESG consulting Jonathan Hale said. “But what you want to see behind a decision is who made it, and around what key points, what can we connect it with? Or was it just a call from the chief executive to the media team to get the message out now?”

Hale acknowledged what seems obvious — that it is hard for business to navigate a way through a fast-changing geopolitical situation — but he also suggested businesses ought to have thought about these things in advance. “Poor governance can require business leaders to make complex decisions in a scenario that could have been avoided,” Hale said.

Does the Russian pullout indicate a more general weakness in property industry governance? Could taking governance a lot more seriously help property businesses to work better for their owners, customers, investors and the community at large?

The Clanging Bell

If for you 'governance' means box-ticking and following the rules, then there’s nothing very much here to get excited about. Governance is pure process, and no wonder it gets ignored.

But this is an error. According to the experts, governance could be the transformational element in ESG, if the property industry learned to take it seriously.

“Too many people think of governance as almost like a kind of hygiene thing,” Storey Consultants Director Tom Storey said. “Like it's about catching the regulation and compliance issues. But that’s just the bottom level of governance. One step up is to ask what you are doing, and further up still you have policies getting written with involvement from people and communities, and at the top it's about collaboration, the most difficult bit of all, in which businesses do not compete with one another, but learn from one another.”

In this vision, governance is as far from box-ticking as you can get. Instead, it is potentially life-changing.

Developers take a similar view. “All three — the E, the S and the G — are interlinked and inseparable," FORE Partnership Managing Partner Basil Demeroutis said. "You can’t just do one on Monday and then another on Tuesday, they all form one thing. It is fine to say you are doing, or plan to do, socially impactful things, but how are you measuring it, and proving to yourself and others that it is happening?”  

A values-based decision-making regime is sadly absent from a lot of businesses, he added. “Governance forces you to live the virtuous life you say you do on climate, or sustainability or how you treat your investors. Without good governance, you are just a clanging bell."

The emerging cohort of B-corps, whose guiding bylaws have been changed to make sure this is always the case seem, to Demeroutis, a good way to frame the issues.

So in that regard, is good governance the secret ingredient that turns your environmental objectives (net-zero carbon) and social objectives (a diverse workforce) into reality?

Actually, no. Nobody Bisnow spoke to thought that embraced everything there was to say about governance, laudable though it is. Governance is about something much harder to accomplish, and more painful to attempt. But the payoff is also that much larger.

Let There Be Harmony

Governance, according to the experts Bisnow talked to, is about recognising the trade-offs and complications of trying to do the right thing — and then actually doing the right thing.

Alexandra Notay is placemaking and investment director at investment managers PfP igloo and PfP Capital. Governance at PfP obviously involves a great deal of paperwork; the Financial Conduct Authority requires it. But it is also about pushing in uncomfortable directions.

Notay said this gets harder the more seriously you take it. “You have to have difficult discussions,” she said. “Look at supply chains, for instance. This is an issue not just about your emissions but about everything in your supply chain, right back to asking does it end with a child in Bangladesh soldering something onto something else?”

The same goes for diversity and inclusion. The pace of change in real estate is slow; just 14% of staff are women, according to data from the RICS showed. But that leads to the risk of tokenistic answers, like chucking a load of diverse people into different roles, which isn’t the answer, she said.

"The answer is to create a pipeline of talent and that takes time. The vogue when I joined the industry was to employ women with master’s degrees in sustainability. It looked good, but they had no team, no budget, and the businesses had no appetite for enforcing anything,” Notay said. The implication is that improved governance would have seen through the greenwash a lot quicker.

Good governance will also cut out a lot of woolly thinking. “For instance, we have put gas boilers into some of our houses in Scotland. Obviously that’s not ideal, but to do anything else would have pushed up costs and pushed our residents into fuel poverty. So it’s not easy,” Notay said. “People who make blithe pronouncements about ESG haven’t looked under the bonnet.”

Tom Storey and Knight Frank's Hale make the same point. If governance is proving easy, then you’re not doing it right. It ought to be hard.

“It is easy to connect governance with some issues, but that’s narrow-minded. It's about board composition, shareholder rights, how performance metrics need to be more than financial, there’s a lot more than focusing on just diversity issues and net-zero carbon,” Hale said.

Storey takes things a stage further. “Governance is about turning the PR [public relations] into HR [human resources]. Governance is an opportunity to deal with difficult problems,” he said.

Storey’s nomination is mental health issues, all too easily ignored because it is often invisible and hard to handle. “We’re getting two suicides a day in the construction industry in the UK. If that was happening in the City of London financial sector we’d hear a lot more about it,” he said, suggesting this is exactly the kind of issue good governance can tackle.

Notay agreed that the complex problems presented by people have to be at the centre of governance. “This can't just be technical. We can’t lose the ability to engage with people, because policies have to be relevant,” she said.

FORE's Demeroutis also wants governance to get difficult. In particular, to help untangle some ethical issues in finance. “The financial models we use seem somewhat broken; we have to revalue them. The equity fund model is under a lot of scrutiny, venture capital too. That’s where my mind goes when we think about governance,” he said.

Soothing Sweet Music

The final word, however, goes to Storey. Done right, he said, governance turns the discordant demands of ESG into a single harmonious whole. Moreover, it is one capable of making the world a little more pleasant.

“If you gave governance a name that sounded better, that reminded people that this is about being responsible for what we want to achieve, it would get a better press. Governance sounds uninspiring, it sounds like a folder full of policies nobody reads,” Storey said.

“But step back; ask why we have a policy in the first place? Ambition and consultation can bring governance to life. Listen to your workforce and governance becomes part of the energy level and happiness at work. Ticking boxes will never do this.”