ENVIRONMENTAL, social and governance (ESG) issues have shot up the corporate, social and political agenda over the past 18 months.

       ESG is the acronym of the day, and the need to align business models with these concerns has never been greater.

       There is growing pressure from stakeholders, be they lawmakers, shareholders, regulators, or activists on companies of all sizes, and across all sectors to recognise and report performance against ESG metrics.

       In the world of real estate investment trusts (REITs), investor base is critical to their ability to easily raise debt or capital in order to grow their portfolios.

       Despite managing to navigate the impact of Covid-19 on their revenue streams, REITs are now facing an increasing awareness by their investors of climate change and ESG investing themes, which is changing the criteria in selecting stocks.

       In addition, banks are getting reluctant to lend to non-ESG-compliant companies or are imposing unfavourable interest rates upon them, forcing them to comply with the new ESG regimes.

       A third challenge is that of tenants – the lifeblood of REITs. Many of the Grade A tenants have already subscribed to ESG standards and practice it rigorously and will seek offices to rent (or hotels to stay) that have very high green certifications.

       Many REITs may have ageing portfolios that could be lagging without the latest building green standards regardless of their asset class.

       This is becoming key to retaining or attracting new tenants and keeping their revenue streams intact and growing.

       REITs with older portfolios will now have to review their assets from an ESG-compliance perspective and commence comprehensive refurbishment programmes in order to bring their assets into the modern ESG framework and retain their investor and tenant base.

       So how do you measure the sustainability of a company?

       ESG criteria are the key factors that have emerged to determine a company’s sustainability.

       Environmental targets:

       > CO2 emissions and efforts to reduce these emissions

       > Energy and resource efficiency

       > Water and waste management

       Social targets:

       > Human rights policies and implementation

       > Labour standards and conditions

       > Diversity and inclusion

       Governance:

       > Economic and business performance

       > Involvement in corruption and bribery

       > Quality and diversity of the board directors

       > Shareholder rights

       In response to the need to create a focus on sustainability in our corporate world, the Securities Commission issued an updated version of the Malaysian Code of Corporate Governance guidelines in April 2021 that outlines the board of directors’ responsibility in ensuring robust measuring and reporting on sustainability by issuing five new best practices for them to execute.

       Global Reporting Initiative (GRI) standards are used extensively by Bursa Malaysia to assist listed companies undertake a survey of their internal stakeholders and develop a list of material matters that need to be addressed in their sustainable reporting.

       From this, companies can develop a materiality matrix and look at addressing what is high, medium and low priority.

       From this, they can embark on a programme to execute what needs to be done to succeed.

       Companies are now rushing to move more aggressively toward a GRI-compliance framework and sharing their report card with their stakeholders.

       Many companies are realising that ESG issues are material to financial growth, engaging stakeholders, improving operations and attracting investors.

       What is ESG investing?

       The idea behind ESG investing is simple: make your morals line up with your money. So, ESG investing is nothing new, just an evolution of an old idea.

       However, it has shown quite a lot of progress in recent years and the ESG market could hit US$53 trillion (RM222.12 trillion) by 2025, an entire third of global assets under management.

       How is ESG going to impact REITs?

       We are witnessing a shift in the REIT investor stock selection as they pivot towards REITs that have demonstrated a commitment to zero-carbon goals and sustainability goals.

       Malaysian REITs (MREIT) that can demonstrate a deep commitment to environmental stewardship, social responsibility and good governance with portfolios that meet modern green standards will attract a strong investor base, coupled with easy capital raising, lower borrowing costs and better returns to unitholders.

       Before the pandemic, many foreign investors had already exited MREITs, citing reasons of low growth, but mainly liquidity and scale. We now have a chance to win them back with a solid ESG strategy.

       There is a big global audience for such assets today and it would be great to see the return of foreign funds to Malaysia.

       What I see as encouraging is that many MREITs have already commenced their journey with ESG, and some are quite advanced.

       For example, Sunway REIT established a Sustainability Working Group, which would be responsible for Sunway REIT’s sustainability journey, back in April 2015 in conjunction with the formalisation of Sunway REIT Sustainability Framework. This is chaired by the CEO of the manager.

       Sustainability Key Performance Indicators (KPIs) are part of the CEO’s overall KPIs, which are linked to the performance measurement evaluation process and remuneration reward system. They have a comprehensive sustainability commitment, which is commendable.

       On checking the annual reports of other MREITs, it is encouraging to note that they too have started similar ESG journeys with comprehensive annual reporting on their ESG compliance.

       It appears that the MREIT industry is poised to capitalise on the increasing focus by investors on sustainability.

       Singapore has the largest REIT market in Asia (ex-Japan) and is increasingly becoming a global REIT hub and recognised for their focus on sustainability. I hope that the MREITs’ ESG journey will now propel us to achieve similar growth.

       Regular dividends, capital growth, excellent management and a commitment to be part of the solution for addressing climate change makes MREITs one of the safest and socially responsible investments in an increasingly volatile and uncertain investment climate.

       Datuk Stewart LaBrooy is honorary secretary of Malaysia REIT Managers Association and chairman of Alpha REIT Managers Sdn Bhd. The views expressed here are the writer’s own.