Originally Appeared in Institutional Real Estate, Inc., September 2022
Chase McWhorter, Institutional Real Estate, Inc.’s managing director, real estate & infrastructure, recently spoke with Sarah Borg-Olivier, COO and senior vice president, and George So, managing partner, at Instar Asset Management, about how businesses can make ESG considerations meaningful for employees, boards and communities. Following is an excerpt of that conversation.
Q: We have seen global standards emerge at a broader regulatory level, but what does ESG really mean for individual businesses and employees?
SARAH BORG-OLIVIER: There has been a fundamental shift from the concept of the primacy of shareholder value to how value is created for all stakeholders. There is a much broader, deeper acknowledgment of the social contract that exists between businesses and the community, along with an awareness that the challenges we are facing as a society simply cannot be solved by governments alone. There is a need and a role for the private sector to be a catalyst for sustainability and for improving equality within our society as well. For businesses individually, the focus is on our purpose and our social license to operate, and demonstrating to stakeholders how we are contributing positively to the economy and to society more broadly. From an investor perspective, there is a deeper appreciation of how ESG practices and progress
are effectively a barometer for management quality and growth potential. There is an increasing consensus that ESG- and climate-resilient businesses are going to be more valuable five or 10 years from now.
GEORGE SO: There is quite a bit of attention and momentum around ESG that has really proliferated
within the investment community. Ultimately, I think that turning key metrics into meaningful impacts will come back to corporate purpose. How are we integrating and expressing values, vision and purpose throughout a business? If you look at the Instar Way, for example, we’ve established a culture of putting people first by centering all operations on one core question: “how can I help?” This question drives our culture, and this mindset becomes a part of each employee’s day-to-day activities, promoting and embedding ESG initiatives in everything we do. For us, ESG is not just a policy but directly informs how we conduct ourselves and engage with stakeholders, employees and communities.
Q: How can asset managers partner with businesses to instill a culture of ESG at the operational level?
SB-O: Across our portfolio, we have invested a lot of time partnering with our C-suite teams and
boards to define ESG within the context of each organization’s purpose, and to then explore what
that means to customers, employees, communities and other partners. We also build ESG accountability
directly into the structure from the beginning, making it a board-level priority. In addition, ESG objectives are part of each portfolio company’s goals, growth strategy and value creation plan. They’re also linked to short- and long-term remuneration and overall outcomes. I think that link is very important and goes beyond reporting and tracking metrics. It’s about engaging each team and operationalizing ESG across the
portfolio in whatever way is most material, meaningful and impactful for each business.
GS: Another way we’ve engaged our portfolio companies on ESG is through customer interactions. Many of
our portfolio companies serve clients with significant expectations around climate and decarbonization.
Customers are increasingly asking our portfolio companies about their measurements, key performance
indicators, carbon considerations and even human capital strategies. By supporting management with the
implementation of strong ESG strategies, we help our portfolio companies strive for global best practices and proactively address customer concerns or demands. This way, we are showing the value in ESG initiatives from both an ownership and revenue perspective, including how important it is to incorporate ESG into your customer value proposition and how it strengthens long-term client relationships.
Q: With natural disasters and extreme weather events, the environment has always been a major focus for ESG initiatives. Where are you seeing opportunities in Social and Governance, and how has that evolved over the past few years?
SB-O: I think a lot of people miss that the “E” is deeply entwined with the “S,” if you consider how
the impact of environmental degradation tends to be exacerbated in regions and communities where there
is greater social inequality and poverty. In my mind, there has always been an inherent “S” component
to that broader conversation on climate change. The pandemic has further underlined how certain social
groups and communities are particularly vulnerable to crises, and often disproportionately burdened by
the measures taken to adapt to or mitigate the event. Having a social license to operate calls for the inclusion of a broad spectrum of stakeholders in planning and decision-making about our essential infrastructure. Companies that do that well are truly differentiated.
The pandemic has also prompted an increasing emphasis on human capital management and how businesses should be a broader reflection of society. Corporate culture and human capital have always been important areas of diligence for investors but, coming through the pandemic, there is going to be an even greater desire to better understand management practices, the quality of the work environment, diversity, equity and inclusion initiatives, and how a company’s stated values align with its actions.
GS: When I think about the portfolio and our contribution, there is a lot that we have actively
promoted through governance. From a governance perspective, as Sarah mentioned, we help instill best
practices, whether that is creating remuneration alignment, having diligence around business strategy
or developing business plans that stretch beyond a year to achieve short-, medium- and long-term corporate objectives. At the board level, we prioritize the creation of a diverse board that is not just made up of Instar or leaders in the financial sector; we also include independent directors and advisers that complement the management team within their specific subsector.
Q: What are some of the biggest challenges businesses face when looking to begin tracking or reporting on ESG performance indicators?
SB-O: There are a variety of different frameworks, standards and organizations out there, and that’s challenging for GPs and LPs. Which one do you choose? What’s the right match for the nature and size of your business and the investments that you make? This really leads to the second challenge: How do you know if you are comparing something in an apples-to-apples way? There’s the challenge of consistency and being able to derive meaning. We think a lot about how to demonstrate meaning, develop the narrative and show tangible outcomes. We have set portfolio-wide metrics across each portfolio company related to greenhouse gas emissions, workplace health and safety, and diversity, equity and inclusion that we track for every business. We also set company-specific metrics reflecting the nature of each individual business and the particular sector or subsector it operates in. That is a very consultative process over a period of time. When I think about how we are evolving our reporting, it’s really about ensuring consistency from year-to-year and being able to substantiate how we are moving the needle on some of the ESG initiatives that we have under way.
GS: One great way to get teams thinking about ESG is through employee engagement and surveys. These
tactics can be very telling, bringing forward a lot of data that can assist with building and addressing the “S” and the “G” from a corporate perspective. For example, this could include something as basic as remuneration and compensation or a team’s working environment. Having that level of people-first engagement over multiple timelines and seeing the trends, questions and surveys can bring forward thought leadership. Though it may not seem to traditionally fall under ESG considerations, this type of employee engagement can be a significant value driver for future growth.
Q: Have you noticed any value from the early stages of these ESG initiatives? What are your predictions for the value or opportunities that could emerge over time?
SB-O: There are a lot of great examples across our portfolio. There’s a growing body of research that shows the positive impact of ESG on returns to investors and a company’s value — but it’s sometimes difficult to quantify what the value impact will ultimately be. Focus first on the low-hanging fruit, such as energy efficiency improvements or the addition of renewable energy, which can deliver immediate cost savings and contribute to emissions reductions. We also aim to think strategically about leveraging strong ESG practices to deepen stakeholder and customer relationships, which can be tremendously valuable over
the long term and fundamental to underpinning that social license to operate.
GS: Our portfolio companies are incredibly well positioned to support increased sustainability. If you look at our private aviation businesses, we were among the first to introduce sustainable aviation fuel in Toronto and Seattle. In terms of addressing some of the carbon thematics around ESG, PRT Growing Services grows seedlings for reforestation and afforestation purposes. We are embracing the opportunities around carbon sequestration and carbon neutrality, and expect these opportunities to grow in the future. It is exciting to participate in these material macro changes at the front-end in the business industries we’re operating
in, and to think about how early ESG initiatives can be positioned to create value for our investment companies.