Climate change’s ramifications for real estate, the rise of innovative technologies and the changing nature of stakeholder activism are some of the environmental, social and governance trends to watch as 2020 kicks off, according to an outlook from MSCI.
While asset owners have been eyeing the potential effects of severe weather events and natural disasters on real estate for years, new regulations are adding another dimension to the climate change story. “Location matters in real estate and vast portions of the global property stock are in cities and regions marching toward zero-carbon building standards,” the report said.
Real estate investors may start to experience a so-called brown discount in their portfolios as regulators pushing for lower emissions standards begin to impact the value of certain real estate. “This brown discount would penalize properties not transitioning toward zero-carbon emissions — the type of market shift aligned with tightening standards in key property markets around the world.”
As well, the MSCI noted opportunities for investors when it comes to solving the climate crisis. While many have speculated that smaller, start-up companies will take the lead in developing solutions, investors should also watch for sleeping giants: larger, established companies biding their time and amassing technological developments to deploy at the right time, the paper said.
“Given the scale of investment opportunities at hand, the more traditional means of identifying them may not be enough. In 2020, we anticipate the race will be on for investors to ramp up their search for companies with solutions to half carbon emissions, pushing them to harness alternative data sources that today are overlooked.”
As for human resources, many companies are experiencing the parallel need to phase out certain job skills, while hiring for new ones as technology develops and the skills needed in the workplace evolve. As a result, human resources departments are dealing with both gluts and shortages of talent.
“This tension is starkly visible in the automobiles and components industry,” the outlook said. “Report after report of large-scale layoffs at industry stalwarts such as Ford Motor Co., Daimler AG and Nissan Motor Co. Ltd. in 2019 drew media attention and union protests. The core of the issue was the move to electric cars, which are simpler to assemble: fewer parts; fewer complications; fewer workers.”
Further, public discourse appears to be tilting power away from shareholders to broader stakeholders, the report said. For example, the U.S. Business Roundtable and the World Economic Forum have recently made statements emphasizing the need to move away from shareholder supremacy, allowing companies to focus on sustainable value creation with all stakeholders in mind, including employees, suppliers, customers and the communities in which companies operate.
In addition to the trends mentioned above, the MSCI report also flagged that more companies may closely link ESG criteria to the terms of their capital, for example through ESG-linked loans. “In 2020, ESG storms the [chief financial officers’] office, elbowing its way onto the bottom line as financiers get creative with ways to bind ESG criteria to their terms of capital, introducing a plethora of corporate borrowers into the wide world of ESG.”