In this video, four industry experts share their top tips on implementing ESG, from setting clear, measurable KPIs to tackling challenges along the way.

Transcript featuring:

• Colleen Collins, Managing Director at Oak Street Real Estate Capital, now part of Blue Owl Capital

• Abigail Dean, Global Head of Strategic Insights, Nuveen Real Estate

• Laura Dietzel, Partner and Real Estate Senior Analyst, RSM

• Mackenzie Turner, Director of Impact & Policy, The Vistria Group

• Nicole Lee, SVP, Head of Content, Preqin

Topics discussed:

• Is ESG becoming mainstream?

• Examples of ESG implementation

• Setting clear, measurable KPIs

• Challenges when adopting ESG

• Top three ESG tips

• Future outlook for ESG in alternatives

Transcript:

Nicole Lee, Preqin: Welcome to Preqin Roundtable, a forum where top industry leaders share their insights on key developments in alternative assets.

I'm Nicole Lee, Head of Content at Preqin, the Home of Alternatives. On today's Roundtable, ESG and the Middle Market: Defining a Roadmap for Success, industry experts will share their top strategies for effective ESG implementation. First I'd like to welcome our panelists.

• Colleen Collins is a Managing Director at Oak Street Real Estate Capital, now part of Blue Owl Capital

• Abigail Dean is the Global Head of Strategic Insights for Nuveen Real Estate

• Laura Dietzel is a Partner and Real Estate Senior Analyst at RSM

• Mackenzie Turner is Director of Impact & Policy at The Vistria Group.

Welcome Colleen, Abi, Laura and Mackenzie!

Is ESG becoming mainstream?

I wanted to start by taking stock. In your view, how familiar is the alternatives industry with applying ESG factors to investment or organizational performance? Has it become mainstream or is it still a nice to have? And for this one, Laura, I thought we’d kick it off with you.

Laura Dietzel, RSM: Yeah so we've definitely seen the growing importance of environmental, social and governance issues. It's really reached an inflection point for the middle market even in the face of the dramatic economic fluctuations of the last two years, so it's absolutely top of mind.

We have proprietary research on 700 middle market executives that we pulled showing that, across industries, ESG and climate change are very much in vogue and top of mind. From Q4 2019 to Q3 2021 executives indicating that they were very familiar or somewhat familiar increased from 39% in 2019 to 69% in 2021. In fact, two thirds of those companies have a dedicated senior executive in setting ESG strategies, so in the C-suite familiarity is high, but as you begin to cascade down the organization, familiarity really begins to wane.

Nicole Lee, Preqin: That's really interesting, thanks Laura for that overview. Colleen would you like to jump in with some thoughts on institutional investors and their interest in ESG?

Colleen Collins, Blue Owl Capital: Yeah absolutely. Oak Street is a real estate investment firm, and how we raise our money is we go out and raise our money through institutional investors, so 80% of our investors are public pension plans.

A lot of institutional investors have ESG implications. If you don't have an ESG strategy, they may not invest their money with you, so it's becoming increasingly important in the private equity space.

On the fundraising side I'd say another place that it's become pretty important - and you'll probably hear this theme from the other panelists - is really in talent acquisition.

As you look at who you're trying to hire - millennials and Gen Z - these are critical items to them for a decision in where they're going to go, and in everyone's space but definitely in PE in the analyst programs, you need to have that to have the right talent.

Nicole Lee, Preqin: Gotcha that's really fascinating, thank you for that Colleen. Abi, maybe we can come to you for a real assets perspective?

Abigail Dean, Nuveen Real Estate: Yeah I would say that for real assets ESG is probably better integrated into investment decision making than it maybe is for some other asset classes and I think that that's because of the direct nature of investing in real assets, where the investor actually has the potential to invest in a way that can improve the sustainability of those assets.

And that's basically the case for real estate, where an investor can take decisions to upgrade buildings, make them greener, invest in lighting and things like that, so I think we see there is quite a well-integrated approach to ESG within real estate.

And as an asset manager that invest globally, we see that particularly in Europe, where the mainstreaming of ESG has been in place for a number of years now, we see that quite a sophisticated approach to ESG integration exists across the real estate investment market in Europe.

Nicole Lee, Preqin: Thank you for that perspective Abi. I wanted to bring in Mackenzie to share her thoughts on whether ESG is a nice to have or becoming more mainstream.

Mackenzie Turner, The Vistria Group: Yeah absolutely. Vistria was founded on the belief that an emphasis on impact and ESG drives value for all stakeholders, and increasingly LPs, institutional investors across the board, this is transitioning from a nice to have to a need to have.

We saw that in our most recent fundraise. The diligence requests on impact went up tenfold and it's transitioning from a check the box, do you have an ESG policy to much more meaningful assessments of measurement and management practices across the board, and I think we're going to see that trend continue as this gains steam and regulatory expectations and the industry just keeps moving in a more sophisticated direction on this matter.

How is your company responding to ESG?

Nicole Lee, Preqin: Thanks so much panelists. We are hearing ESG is becoming more mainstream. I wanted to come on to how companies are responding to ESG, so panelists, I wondered if you could share how your particular company has responded to ESG’s increasingly prominent role in the industry, what kinds of actions are being taken.

Colleen, I thought we'd start with you on this one.

Colleen Collins, Blue Owl Capital: Sure. So Oak Street and Blue Owl, we were the second largest buyer of net leased assets in the United States last year, so what that means is the structure of our transactions are triple net lease, which means that our tenants maintain control of the building, so we don't really have the opportunity to control how they're using it from an environmental standpoint.

That being said, we understand that we have one of the largest industrial office portfolios of assets in the world, so environmental is incredibly important to us. So I'll answer from the perspective of E [Environment].

We really do two things. We have an extremely stringent policy around environmental so we go through our phase one and phase two environmental reports, we never buy an asset that has any environmental issues that we do not feel are being managed by the tenant and we would get into that process and make sure they're managing in a proper way so first, really tight process around environmental from an acquisition perspective.

And then, second, I think we try to make an impact where we can even though we don't control the buildings, by trying to structure transactions with our clients that help them achieve their environmental goals. So a couple of the things that we do, we will structure the financial transactions such that they can use the proceeds for environmental actions.

We did a deal where one of the assets we bought we gave money to put a community garden on the rooftop deck which provided 2,000 pounds of food to the community on an annual basis.

We buy a lot of grocery stores, we put EV [electric vehicle] charging stations into the parking lots, so it's about one, giving them the proceeds in order to make these actions, but then two we go a step further and we will look at their ESG policy and introduce them to our ESG advisors and say “You know, have you thought about this, have you ever talked to this advisor about this policy,” so we try to impact the portfolio as much as we can and make sure that we're giving them the proceeds and relationships with our advisors to help make that impact.

Nicole Lee, Preqin: Wow, so a lot of facilitation that goes on, making it as easy as possible. Really interesting, thank you. Abi could you share a little bit about how Nuveen is implementing ESG?

Abigail Dean, Nuveen Real Estate: Sure. One of the most significant things that we've done in the last couple of years is put in place a detailed pathway to get all of our real estate to be net zero carbon by 2040.

And we very much subscribe to the World Green Building Council view that all real estate must be net zero carbon by 2050. For our portfolio of investments, we felt that it was prudent to get there 10 years ahead of schedule in order to avoid obsolescence and value depreciation that we might see in that final 10 years.

And what we've done is set out a series of five-year milestones that we want to go through in order to achieve that 2040 goal. In the first five years that's focusing on things such as rolling out solar panels across our buildings, undertaking upgrades, moving lighting to LED, improving the efficiency of HVAC, and undertaking retrofit activity to improve the performance of buildings.

But the other area that we're focusing on is the S, the social part of ESG, and we have an extensive investment portfolio in affordable housing in the US and that's an area that we're looking to build on in the years ahead, and continue to provide affordable housing to populations around the world, so that's something that we're really excited about expanding.

Nicole Lee, Preqin: That sounds really promising So setting ambitious goals and then milestones, very interesting, thank you. Laura could you share a little bit about what RSM has been doing in terms of responding to ESG?

Laura Dietzel, RSM: As the leading consulting assurance and tax advisory firm with over 14,000 employees in the US and Canada, we do have a lot of ground to cover so we've tried to break it down to meaningful goals that we have focused around community, diversity and inclusion, and everyone's favorite focus, E the Environment, that has just been dominating headlines.

With regard to community, in 2014 we founded the US RSM Foundation, it was really established to be our giving platform to drive stewardship in the communities in which we work with, so they focus on educational outcomes and supporting organizations committed to providing stable environments for youth that are at risk of hunger, have housing issues, or health issues.

We recently presented a check of more than $4.8 million to the Davis Love Foundation, based on this focus, and through our employee-led campaign so we’re really proud about how our individuals really want to contribute, as Colleen said it's what our employees require as part of their employment and feeling that they're giving back and doing something greater for the Community in which we work.

As part of Diversity and Inclusion we've been making significant investments. We've invested in creating 12 employee network groups to really make people feel like they're included and part of a team that understands their unique goals and challenges, so we have different groups, ranging from the support and advocacy for women in the workplace, business development of military service members, career development opportunities for our Asian professionals and a group focused on supporting African American and Black professionals, and these are just a handful of groups.

I know that we can all relate that during these past two years we've been running daycares within our homes, schools, and businesses during the pandemic, we have a group called Family First that's focused on the unique challenges of family life and working professionals, so those are just a handful of the 12 employee network groups that are focused on these individual items that are important to our people and our communities.

And then from the environmental side we're all focused. In 2020 the world stopped. Our operations footprint was greatly reduced and the environmental impact was lessened in terms of lessening daily commutes. We're not going to go back to business as usual, we see the future as a place where we'll have a hybrid working environment going forward, small changes in our offices when we are there make big environmental impacts. So just in our office in Baltimore we took steps to remove single-use cups from our offices and saved about 70,000 cups a year in terms of the paper waste that would have been produced. So this is just a handful of items that we’re focused on as we look at our strategy.

Nicole Lee, Preqin: Thank you Laura that sounds like great initiatives, and what I'm hearing is a huge amount of employee engagement as part of that package. Mackenzie over to you, what are some of the things that Vistria is doing, what's your approach?

Mackenzie Turner, The Vistria Group: Yeah so Vistria invests right at the intersection of the public and private sectors in middle market healthcare, education and financial services companies and so as you can imagine there's an inherent opportunity in those sectors to drive a lot of broader social impact beyond just great returns for our investors.

We've established a framework where we look at impact broadly in two dimensions, so we consider business conduct which really captures the environmental, social and governance metrics that we track across our full portfolio.

And then we dive deeper into the specific impact that each of our companies is driving through their core products or services. That's where we're considering what outcomes the company is driving, the quality of those outcomes, and who can access those outcomes.

And we use those to develop a narrative and partner with companies to think about how to drive value in the business across those dimensions. We're incorporating impact from every stage of our investment lifecycle, so we're committed from our theme development process through to exit to partner closely with our management teams to think about both those dimensions and how we can ensure that our companies have really strong corporate conduct so all the right E, S, and G factors in place, but that they're also improving outcomes as we're scaling these businesses.

Examples of ESG implementation

Nicole Lee, Preqin: Okay it's a very comprehensive approach there, thank you. I wanted to just dive a little deeper into some of these plans and strategies, so I wonder, panelists, could you share a couple more examples of how exactly these kinds of plans can be implemented, and for this one Laura I thought we'd start with you?

Laura Dietzel, RSM: Yeah so in terms of just looking at what best in class firms are doing and helping our clients do the same, we have a tool that we use for our clients called our ESG Rapid Assessment.

It's a two-to-three week deep dive investing assessment to just determine where you're at and where you want to go, so it's designed to fit anywhere within the ESG journey if you're just starting out or, if you have a more mature ESG strategy and plan with really the goals of achieving your ultimate goal, whether it's investor reporting, attracting investors, your internal stakeholders, so it really is tailored to the goals within your own individual business, so we focus on the first stage, building that foundation.

So formalizing what your objectives are to help build those robust and sustainable ESG reporting practices that are needed to support that. And then we'll go ahead and look at the different frameworks that are out there and the metrics to your corporate values and the current state, so that you can come up with those actionable results that you need.

And then we'll reassess and refine, so looking at those frameworks and the metrics and the relevance of those and building out reporting capability, so that you can report back to your stakeholders internal and external. And then, once you're in an ESG mature phase, you'll achieve that ultimate goal of embedding it into your business practices in terms of making investments the goals and the process that they go through, so coming up where it's so deeply embedded in what you do it’s just part of what you do every day is really that mature phase and then refining for what's needed going forward.

Nicole Lee, Preqin: Thanks Laura it sounds like meeting the client where they are in their journey, interesting, thank you. Abi, what are your thoughts, how are you implementing ESG plans and strategies?

Abigail Dean, Nuveen Real Estate: Sure, I'll give a bit more detail on how we're going through that journey towards net zero carbon and some of the practical measures that we're undertaking across our portfolio.

For the buildings that we own we’re undertaking a net zero carbon assessment of each and every one to understand what the cost of getting to net zero carbon is going to be and what are the key measures that we want to put in place and initially we're focusing on the no regret actions, easy wins, things that we know will deliver immediate energy savings where we also know that they can help to enhance the value of the building.

That's things like putting in place technologies to help us monitor how energy is used in a building and the technology that's available now can monitor millions of data points a day and can help to achieve some quite significant energy savings, we found that in a typical office building that kind of technology will often save about 30% of energy use at a very low cost.

We’re also looking at putting in place solar installations wherever possible and that works particularly well for logistics buildings or business parks or retail warehouse buildings, any building that's got a big flat roof, and particularly where it's sunny.

That can be a really effective strategy and the cost of solar panels has reduced by about half in the last decade, so we're finding that it's becoming ever more cost effective and the benefit of that is you get an immediate income stream from those solar panels, so that works very well from a commercial perspective.

Other things we're looking at are things like LED lighting upgrades, improving the efficiency of heating ventilation and cooling systems and then more significant upgrades such as improving glazing and facades.

But that's when we move on to the most significant upgrade when a refurbishment is going to be taking place and moving through those practical measures means we're able to make quite significant improvements to the carbon efficiency of our buildings and what we're looking to do there is weave that in to the standard business planning process for each building so incorporating that into existing plans for refurbishment and upgrade and making sure that's not necessarily adding cost. It's more about changing the way that we would undertake things that are happening anyway.

Nicole Lee, Preqin: Thank you that's a really comprehensive description of all the things that can be done as we move towards that net zero carbon goal. Mackenzie could you share what Vistria is doing and perhaps add a little bit more color?

Mackenzie Turner, The Vistria Group: Yeah absolutely, I can provide a little more detail into how this process plays out in our partnership with portfolio companies. We begin engaging with each of our management teams during the diligence process to ensure that there's a robust consideration of impact practices and we're effectively incorporating impact into all of our strategic planning and that we have a really good understanding of what the impact narrative for these businesses are.

We also ensure then that impact is a board level priority for our portfolio companies.

Given we just think it's critically important to both risk and opportunities for the business, and so what that really looks like on the business conduct side of our framework where we think about ESG metrics, for E it's working with portfolio companies to understand what their climate risk is, what their emissions profile is for assessing their footprint, and we've committed this year to conducting a full carbon accounting of our portfolio.

In the service-oriented businesses where they're typically a little bit more climate light we're finding that it's still an important priority to invest behind and think about reduction strategies over time, and so that's an initiative for 2022 that we're spending time on. And then I think on the S side among many other priorities we've really doubled down on our commitments to diversity, equity and inclusion both at the firm level and at the portfolio company level, and this includes through incentivizing our management teams to make progress on diversity and inclusion at all levels.

So from senior management, middle management to other professionals, just really thinking about fostering opportunity across the board.

And then on G we're working with our portfolio companies to think about supporting them to foster a culture of compliance, so thinking about cybersecurity practices and good governance and policies.

That captures on our business conduct side some of the specific metrics that we're thinking about and priorities that we work with. And then on the impact of their products and services that's a really custom approach where we work with our management teams to define a unique set of KPIs that are specific to the business and our commitment is we're not trying to make these companies into something that they're not, so typically these are metrics that they're already tracking for core business operations but help us understand measurable KPIs that get the outcomes the company is driving and how effective they are at driving that outcome.

But we use all of these KPIs to inform our strategic planning.

Nicole Lee, Preqin: Got it, thank you Mackenzie, you were talking about the S and G there and how important that is. Colleen, do you want to weigh in on what your approach is on the S and G?

Colleen Collins, Blue Owl Capital: Yes, absolutely. So on the social side, I think change happens from the top, right so if I think about the Oak Street division of Blue Owl, we were recently acquired by Blue Owl at the end of last year, if I think about the leadership team of Oak Street, over 50% of that team is women and minorities.

And I think that people working for a leadership team that sees that diversity is really important. And we've been able to bleed that down into the organization and we have about 40% of our total organization that are women and minorities, so I think having that leadership really helps drive the culture.

Another thing is again, leadership from the top, is every single one of the people on the leadership team is a member of at least two not-for-profit boards that they sit on outside of work using their own time and resources to give back to the community, in whatever way they see important and, I think, seeing that drives that behavior of giving back to your community down throughout the organization. I'd say a couple other things on S: we have a strategic sourcing group within our business and they make minority investments in private equity and we have $175mn invested in minority owned businesses, so that's one of the criteria we look at when we invest. So again when I talked about it being important to our investors that we have an ESG policy, you can see that from within, because when we're investing it's also critical to us.

And with the Blue Owl merger, one of the things that's been great to see is they have teams – I sit on the retention and inclusion team, we meet monthly to talk about how do we retain talent, how do we have an inclusive environment. And that's just one of about five social teams that we have that's focused on these. Those are not only leaders throughout the organization that's anyone can volunteer to be part of these.

So you kind of self select into what's critical for you and I think that's been a great change that we've seen. Hitting on the governance side I think number one it's critically important when you have institutional investors to have very tight governance right, it's absolutely necessary. So, from a human rights policy and code of conduct, I mean we have to be top of the class in those. If there was ever a hit that we took from not having tight governance or tight compliance, that would mean that we would have trouble raising money in our next fund, so the governance and compliance has always been something that's been driven by how we raise money in the markets.

Setting clear, measurable KPIs

Nicole Lee, Preqin: Thanks Colleen, it's really interesting to think about leading by example and ensuring that it comes right from the top, so thank you for that description. Everything that I've heard so far, it's all so well thought out, and I wondered if you could share with our audience a bit more about how these ESG plans were developed.

What do you see as the most critical steps that need to be taken and how do you arrive at clear and measurable KPIs since that's the basis of what we're trying to achieve here, and for this one, Laura, I thought I come over to you first.

Laura Dietzel, RSM: Yeah absolutely, so with all those great KPIs that Abigail, Colleen and Mackenzie have outlined it's important to know where to even start so that's step number one.

How do you identify, track and measure those KPIs, and the most critical steps in our view that we work with our clients on include benchmarking against best in class and relevant competitors are, first of all, understanding what you're doing and what your competitors are doing in the industry. So who are the best in class in your industry, your direct peers, and it's typically done through some market research and benchmarking.

So we provide a comparison that shows where you're at compared to your competitors, and so what may you want to focus on given your specific industry as well as the frameworks and commitments that you have in mind, both internally and externally.

Number two: identify and select the applicable framework, it may sound like that's a no brainer but it's not that easy. There's not a one size fits all ESG reporting framework therefore it's important to choose a framework that note, not only enables you to achieve your goals, but one that aligns with the values and what you're trying to do internally in your corporation so that might look like a combination of different frameworks.

We typically lean towards utilizing SASB, that’s the Sustainability Accounting Standards Board, due to their specific industry focus, but also look to the other frameworks in terms of picking and choosing other KPIs that may be critical and important to a business. And then once you have your framework in mind, you can align and identify the ESG metrics that you want to report on, so you might have many things, so we just heard a whole litany of items we could think about.

But narrowing them down and making the list, something that you truly can focus on, to report on, that are aligned with your corporate values, the values of your clients and investors, that's a little bit more difficult.

So you may say, all these things sound great but where's our focus and where's the biggest bang for our ESG buck that we want to invest, so you may also be finding that you're tracking ESG metrics without realizing they’re metrics – so take those easy wins, take credit for what you're already doing and show that internally and externally to your teams.

Just because you have a KPI you want to track doesn't mean you can. So understand where you're at in terms of your business units and data systems that you may need to continue down your path and get from where you're at to where you want to be.

Nicole Lee, Preqin: Thank you so much Laura. Colleen, over to you on your approach to setting KPIs?

Colleen Collins, Blue Owl Capital: I think I'm going to give a sales pitch for Laura and RSM in my answer here. I think that the critical piece is the importance of accountability.

Many businesses like ours don't know what the measurable steps right, this is not our day to day jobs. But it's important to us, but if we don't have a way to measure ourselves, we have no way to find ourselves accountable. At Oak Street, Blue Owl, we met with Laura and her team at RSM to go through that rapid assessment and say what are we doing that we can track, how do we keep ourselves accountable, how do we hold ourselves accountable because teams like Laura's have a far better metric base, right, they're able to draw data from not just us but from everyone in the industry that's doing the same thing.

I think the critical piece is finding a partner, whoever that is, or gathering the data that helps you track a measurable statistic that keeps yourself accountable, because I think otherwise what can happen is you get together as a team, you say “Here's our ESG policy,” you put it on your website and then you're not really addressing it on a year by year basis to make impacts, the way you want to.

Nicole Lee, Preqin: Right so it's having knowledge about what peers are doing in the industry is actually really important, the best in class that Laura was talking about just now, thank you Colleen. Mackenzie, could you share a little bit about Vistria’s approach with KPIs?

Mackenzie Turner, The Vistria Group: Absolutely, I echo what Laura and Colleen have said thus far about accountability and importance of that as you're thinking about the metrics you’re tracking.

On the ESG business conduct side of things, similarly we've leveraged the widely accepted frameworks that are out there and assess SASB and CDP and UNPRI and GIIN’s IRIS+ School and spend some time thinking about which of those metrics are most important to us, and we think are most material for our businesses, and then we've set consistent expectations on those for our portfolio companies to track those on an annual basis and think about how we're going to benchmark and think about improvements over time.

On the products and services side it's a bit trickier because we're building a unique set of KPIs for each of our businesses and so that's something that we do in a dialogue with management teams and those are also reported on an annual basis and discuss to ensure we're continuing to track the most relevant metrics.

What we try to do is track things that businesses are already paying attention to, and so, for example in the hospice space where we're investing we're thinking about what are you required to report in terms of quality to CMS, because that allows us to think about how are you performing on these established quality measures and allows us to benchmark against peers, and so we can see how they're performing from an impact perspective and, wherever possible, we try and leverage existing metrics like that, where there's a regulating body.

And where those don't exist we're thinking about how can we use available academic research to think about setting appropriate KPIs and understanding what potential benchmarks are.

It's a definitely a tricky process and it's easier for some companies than others, but I think it's a really important exercise to understand your performance against the industry more broadly.

Nicole Lee, Preqin: Thanks Mackenzie, you mentioned about it being a tricky process and we've heard a bunch of different kinds of metrics that are out there – UNPRI, Laura mentioned SASB earlier. Abi, what are your thoughts on this, there are so many options out there.

Abigail Dean, Nuveen Real Estate: I would definitely echo the points have been made by Colleen and Laura about accountability and transparency, and in order to be able to deliver that I think it is important to look to those external standards and use those as a starting point, so, like many of the others on the call we also use UNPRI, the UN Principles for Responsible Investing.

Because we invest specifically in real estate, we also take part in the Global Real Estate Sustainability benchmark and that's been a really helpful framework. It's very comprehensive and it means that we have a really clear idea, right from the start, and that we can build on year on year of how our funds perform on sustainability compared to others in their peer group, so that's really useful.

I think that provides that level of comparability to investors so they can see very clearly how we perform on certain metrics compared to other funds that they would consider to be comparable so I think for anyone making a start on this journey, I would say, look to those that have credible external sources and build up slowly, start with what you can report on and you'll find that, as you go along, more and more becomes feasible.

Challenges when adopting ESG

Nicole Lee, Preqin: Thank you. Panelists have talked a lot about accountability and how important that is. Let's come on to the challenges in adopting ESG. What do you see as the obstacles or roadblocks, some of the problems that come up, and for this one Colleen I thought I’d start with you.

Colleen Collins, Blue Owl Capital: Yeah, so I think, for me, I mentioned this before, but the nature of your business can have an impact on how much impact you feel like you can have, so if you think about us, we have a massive industrial portfolio which could have a great impact on Environmental but we don't control the asset. So I think what you have to do in that case is just control what you can, what we can control is giving financial resources to make those impacts, to share our knowledge to have a tight policy around the industrial assets that we buy in order to make sure that they don't have the environmental impacts.

I’d say the second thing is just focus, how much time is in everyone's day and I think over the last year and a half, it feels like we're all wearing more hats not less and we just have to carve out the time because it is important to our business, it's important to how we raise money, it's important to how we raise money in our next fund, it's important to how our funds perform, so it is actually really important. But I feel like what we all do in a day is just put out the fire in front of us, and we all have a lot of those fires to put out.

So it's really creating a team, like I mentioned Blue Owl has been instrumental in creating these teams, work streams that help share the responsibility, and Laura mentioned before, a lot of people have dedicated ESG people within their businesses. I think that's a great idea, because if you don't I think everyone else ends up focusing on their day job. But this is as important as those and the overall success of your firm.

Nicole Lee, Preqin: Yes, maybe we'll start to see more of that happening, that there'll be dedicated roles to ensure that those are implemented. Let's go on to Mackenzie, can you share your thoughts about what are some of the biggest challenges you've encountered in adopting ESG?

Mackenzie Turner, The Vistria Group: Absolutely, I think one of the biggest challenges that we're finding is just the sheer number of frameworks that are out there in terms of trying to [assimilate] lots of taxonomy popping up, it seems like every day, trying to get at the right metrics and the right framing for all of this, and it can be difficult to sift through all of those different frameworks and assess which to align with and which ones are going to rise above the others.

I think that it's going to continue to be a challenge until there’s a framework that rises above that can be used then for firms to also start to be able to compare some of this data, because one of the complications is we're talking about some data that doesn't always come out super cleanly.

Not everyone's tracking everything in the same way, because of all these different frameworks, and so it makes it really difficult to compare within sub sectors, across sectors, and that's really complicated when you're trying to think about management practices and how to think about developing strategic priorities around these metrics when it's hard to benchmark and compare them, and that's a tricky area, and hopefully we'll see some progress over the next year, in terms of some coalition around a couple frameworks that can be used as guiding lights for this work.

Nicole Lee, Preqin: Mackenzie's been mentioning these multiple frameworks that’s becoming a challenge. Abi does that resonate with you, do see that as an issue?
Abigail Dean, Nuveen Real Estate: Absolutely and I would really echo what Mackenzie’s said about some of the challenges, particularly in relation to data gathering, data management, data reporting, and ensuring that the data that you are gathering works and can be reported against these different frameworks, because it all feels like they are kind of the same thing, but in slightly different ways.

So that is definitely a challenge and the availability of that data is really tricky and I know this is a point that Colleen has made as well, and specifically in relation to investment in industrials. We also have a large industrial portfolio and we feel that we want and need to understand what the operational carbon footprint is of that industrial portfolio, because that represents investment risk, but it's very hard to access that information you're relying on the occupiers giving you the information, they're not obliged to do that in many instances. And then, if they are willing to do it, how do you ensure the accuracy of that data, so the data side is undoubtedly a significant challenge and does suck up a huge amount of time and effort.

Nicole Lee, Preqin: Thank you Abi, so we've heard from panelists around issues like measurement, the multiple frameworks, what can actually be achieved, given that not every company has dedicated staff, so I wanted to come on to Laura. Laura, you have a macro level perspective, you can see what different companies are doing, what do you think are the biggest challenges facing businesses wanting to implement ESG?

Laura Dietzel, RSM: The biggest challenge is: focus being power, so we all have conflicting priorities and so really, the number one issue is finding that dedicated resource focused on it, day in and day out to achieve it, so individuals who are focused on it, they know it's their day job it's not just something that they're moonlighting in that role and trying to solve for, is essentially critical.

If you put it off or wait as a company to make those investments, maybe it's not a top priority, there's really a risk that your investment strategy or your investments themselves will become obsolete. It’s not if it’s when. Governments are pushing to tax carbon emissions in the future, or there's going to be additional taxes on not having sustainability within your ethos and most real estate investors can probably agree that if coastal cities are submerged by rising sea levels, that's not very good for business.

So it's a little bit of understanding and controlling your own destiny here, your future corporate self will thank you for the investment you make today, although that ROI in the short term might not always be your top priority, especially given the pandemic and all the other challenges we've had to endure over the last couple years, so going into the future investment in sustainability, in particular ESG is going to be understood as a cost of doing business versus a nice to have.

Top three ESG tips

Nicole Lee, Preqin: That's really helpful Laura thank you, so as you said, it's not if it's when.

So for listeners wanting to get started this journey, but feel “I'm so overwhelmed by all the different things I've got to do, how much there is to achieve in the ESG space, I'm not sure where to start.”

I wonder panelists if you could share some advice for firms that are just starting out on this ESG journey, if you had to name say your top three tips, what would they be, and I thought I'd start with Colleen.

Colleen Collins, Blue Owl Capital: Sure, so I think the first is, which we've mentioned before, is just control what you can. Sometimes it doesn't feel like it's enough.

But if we all controlled what we could then, we would be much further along in this journey than we are today so just because you don't feel like you can make a big impact in E, in S, in G, whatever it is, control what you can, make the impact you can and if collectively we do that, I think we will make a massive impact, so that's first.

Second is really you know I spent 15 years at GE Capital and they had a strong ESG policy, and one of the things that the CEO used to always say is “Green has to be green.” So again, if we don't focus on why this is critical for our business’s profit over time it gets pushed to the wayside. But the fact of the matter is this is incredibly important for our returns over time, our ability to raise money, our ability to put our money out effectively in the market, so it should be top of the mind, even though sometimes it doesn't live there.

So green has to be green. And then the third is – this has been a resounding theme –accountability, you can paste an ESG policy on your website in the matter of an hour, if it's not something you live day to day you don't have an ESG policy, so it needs to be something that's critical to your business that you hold yourself accountable and that you measure yourself against.

So those would be the three I would focus on.

Nicole Lee, Preqin: Thank you so much Colleen, it's really helpful and accountability is very much a theme in this talk. Mackenzie let's come on over to you, what would be your top three tips for people who are just starting out.

Mackenzie Turner, The Vistria Group: I think mine are going to be quite similar to Colleen’s. I think that first one, I would say is similar in terms of control what you can, but you need to think about what you're trying to accomplish and use this to inform your framework and think about defining what areas are most important to you, based on the stakeholders that you feel like are most important.

And that can be a range of things, maybe it's compliance with forthcoming regulatory standards or maybe it's more actively driving impact for a particular set of stakeholders, or for a particular area within ESG. But either way I think it's defining what's most important to you and using that to inform your framework.

And then I think the next layer down is within that framework, defining what the clear and consistent and measurable KPIs are that are going to help you, understand progress over time and then setting up the right methods to track those over time that's realistic from a reporting standpoint as well and acknowledges bandwidth and all of those key factors.

And then my last point would also be pretty similar to Colleen’s final point on accountability, but I think it's making sure that there's buy in from all the relevant stakeholders that you're working with from the top of your organization down to every employee in your portfolio that there's alignment and consistent messaging about what your approach is and what's important because that's going to allow your impact practices to exist within your base processes and rather than being a side project it's integrated into what you're doing on a day to day basis, and I think that's critical.

Just from a value driving perspective that's how you're going to make progress on these matters is to make this part of your day in and day out operations.

Nicole Lee, Preqin: Thanks Mackenzie you mentioned integrating that really brings to mind what Laura said earlier about employee engagement and all the different initiatives that they have at RSM, so thank you for that. Abi what are your thoughts on this, what are your top three tips?

Abigail Dean, Nuveen Real Estate: I think equally mine will echo what we've heard from Mackenzie and Colleen but I'd probably start with collaboration, I think that ESG is an area that's quite unique in that it's an area where organizations and investors are more willing to collaborate and share information and there's a lot of information out there from industry groups and from groups of businesses that have put stuff in the public domain, which is really helpful for those starting on their journey, so I think reach out for help, collaborate, and look for those resources.

I think the second point I'd make is keep your key stakeholders in mind so in assessing an ESG strategy, think about who you're doing this for, and then the answer will probably be multiple different groups. But think about the individual ESG actions that you put into place and who they're aimed at – so is it about investors, meeting their needs and demands; is it about the occupiers, is it about your own employees, but be intentional about which stakeholder group you're actually aiming to deliver for with your different actions and that really helps to focus efforts.

And then the final point I'm making again, this is very similar to the integration point that we've heard from the other panelists but ESG is everyone's job, it absolutely has to be, and we're not going to come anywhere near close to meeting some of these huge systemic challenges that we have if it's not a part of everyone's job.

We are fortunate enough to have an ESG team within Nuveen, but we don't want to leave E, S, G just to that team, we want ESG to be incorporated into everybody's role and has to be top of mind in order for a fundamental shift to take place in the way that we invest so you know we put a lot of emphasis on regular training, setting objectives, and making sure that everyone understands how ESG relates to what they do on a day to day basis.

Nicole Lee, Preqin: Thank you very much Abi. I wanted to come on to Laura, Laura you know from Rapid Assessment to advising businesses, you've seen what works, what doesn't, what are your top three tips.

Laura Dietzel, RSM: Well, for me it comes back to trust, so building that trust with stakeholders is critically important. We have concerns, valid concerns that asset managers are making misleading claims to the extent which their allocations are doing good for the planet and its inhabitants, and that is a big problem in terms of building that trust. The way that we see trust being inserted back into the equation, maybe through the verification and attestation over what you're tracking and reporting on, we're seeing an increased need from our clients saying “Can you help validate the report that we're putting out there,” whether it's assurance, attestation, engagement, or to provide support for what you claim and what you're putting out there.

Currently, for real estate companies it's a nice to have and it's only a matter of time again before this becomes required, such as in Europe for certain industries as well as some industries in the US like oil and gas, where it's required to be reported on.

The second is data investments, so you won't be great at telling your story if you don't have the data to back it up, so figure out where your gaps are and move to make improvements to ensure that you have the data that you need to get where you want to go.

And then the third: use that technology, so technology enabled investment, whether it's artificial intelligence, proptech, or benchmarking technologies, can help you mitigate risks and drive efficiencies. Some players in ESG metric dashboarding include Apex, ESG Playbook, EXM, so there's a lot of different players out there that realize that you need to understand the metrics, where you're at, that benchmarking, and to be able to show that off to your stakeholders to really drive a difference. Those would be my top three.

Future outlook for ESG in alternatives

Nicole Lee, Preqin: Thanks so much Laura and, as you noted there is an initial investment required, but it is increasingly not an “if” but a “when”, so it's necessary investment.

I wanted to come on to the future now and look ahead. Panelists, how do you see ESG shaping alternatives in the coming say 12 to 18 months? Colleen I thought I'd start with you.

Colleen Collins, Blue Owl Capital: I’d say the future is now. Echoing Laura's points – if there aren’t requirements in your specific industry, over time there will be. If there's not a requirement in our industry, but it would impact how I could raise money in the institutional markets, so the future is now, and I think we're going to see that driving behavior over the next 12 to 18 months.

I'd say the other thing is back to value creation, if it's not driving better returns for your investors you're doing it wrong.

There are changes that are happening in the industry, so an example is when we do deals we use leverage our transaction, so we go out and raise debt in order to leverage our deals. And right now, already, banks have programs where, if you have a measurable accountable ESG program you might be able to get a bit cheaper debt.

If you can get into that program and we're going to see more banks do that, so the cheaper leverage I can put on my transactions, the better returns I can get for my equity investors, so there are going to be things where this is not just you know because we're good stewards of the world, it's because we're also driving value for our investors.

And I'd say, the last thing that I touched on before is just it is important to everyone, but it's really important to the generations, like millennials, Gen Zs that are following us, that are going to be our future. So building this out now is critical and I think the older and more part of the workforce that generation becomes over the next 12 to 18 months, the more we're going to see pushback from employees on “I'm not going to come work for you if you don't have a strong ESG policy”, so I think because of those three drivers we're really going to see some movement over the next 12 to 18 months.

Nicole Lee, Preqin: Thank you Colleen, strong drivers that will explain why this is something that's here to stay. Mackenzie let's come over to you, what's your outlook for the next 12 to 18 months when it comes to ESG?

Mackenzie Turner, The Vistria Group: I echo everything Colleen said, and just add obviously it's here to stay. ESG is going to continue to become a more ingrained part of business as usual in the private markets as it's increasingly been in the public markets, and back to the accountability piece again – it's soon not going to be enough to have the policy on your website, and nice marketing material.

You're going to need to have the data to back all this up and there's going to be reporting requirements and a demand to prove that firms are doing what they say that they're doing, and hopefully with that will come some more agreement on the right frameworks and tactics to measure, all of this. But I think it's just going to continue to become a more robust part of business operations.

Nicole Lee, Preqin: Thank you, Mackenzie, I thought I'd come on to Abi. Abi what are your thoughts, what do you see in the next couple of months coming up?

Abigail Dean, Nuveen Real Estate: Building on the theme of the mainstreaming of ESG I would say that it's already table stakes for attracting capital, and it's already a minimum requirement.

And where I think we'll see it evolving over the next 12 to 18 months is more of those proof points emerging on the link between ESG performance and value, so I do think we'll start to see more of that data emerging showing that green buildings can bring higher returns and better rents and hold their value better, and I think that's already starting to emerge, particularly in some European cities for office buildings.

But I think we will start to see that rapidly emerging for other locations as well. And I think the other thing that we will see in the near future is this continued build of focus on the S in the ESG and so focus on diversity & inclusion, focus on social inequality, and thinking about what is the role of the investment world in trying to address some of those challenges as well, I don't think that's going anywhere, I think that's definitely here to stay.

Nicole Lee, Preqin: Thanks Abi, and I thought for the last word on this we’d come to you Laura, what are your thoughts on the outlook for the next 12 to 18 months?

Laura Dietzel, RSM: I appreciate it. I'm an auditor in my day job so I'm naturally a little bit more skeptical. It's great to talk about ESG in our goals, and what we can achieve in the next 12 to 18 months. Many companies have taken that net zero pledge if we're talking about the Environmental Pledge for Carbon Net Neutrality, but we know that there’s an investment behind that that needs to be made.

The International Renewable Energy Agency pegs that clean energy investment needed to reach that objective is at $131tn. It's not a small investment, it's a big investment and it needs to be a top priority of corporates around the world to actually move the needle, and so that starts with action now and not just a pledge.

So when companies are saying they're going to be carbon neutral, they're appeasing climate activists that may be on their backs and getting unwanted press, but they don't really have much to say about the cost and the investments that they're making today to be able to hit that target. So in many cases climate agendas can squeeze profits, pitting companies against their obligations to their investors. We talked about how going forward this is going to be viewed as a cost of doing business, and I think in the next 12 to 18 months it's increasingly going to be accepted that it's a cost of doing business as regulatory pressures and legislative agendas become more apparent and there's an increased appetite around this area.

Nicole Lee, Preqin: Thank you Laura. So it's very much the future is now, that's what I've heard from everyone on this discussion. It's about accountability, making sure you have the right frameworks in place, the right KPIs in place, ensuring that you've got buy in right from the top and employee engagement, so that everybody is integrated into this drive forward. We're going to see more and more of that in the coming months.

Thank you so much panelists, this is a really illuminating discussion, really useful practical action steps. I want to thank everybody for taking part and also thank you to everyone who's listening to this video. I look forward to welcoming you to our next Preqin Roundtable.