Life Science Properties Must Make ESG a Priority. Here’s How.
Suzet McKinney of Sterling Bay says investors and fund managers use environmental, social and governance ratings to guide real estate strategies.
Even before COVID-19, the life science real estate market was heating up as never before. Behind this growth are demographics—an aging U.S. population requiring more healthcare facilities—and a well-documented preference among biotech, biopharma and health-care device manufacturers for better appointed, more sophisticated spaces for their research, development and production.
Now, as the pandemic abates, venture capital is flooding into the sector at a historic pace, with VC allocations breaking records every year. But like nearly every other investment category, life science real estate is increasingly being evaluated through the filter of environmental, social and governance criteria. Indeed, ESG investing is booming, and has become “a critical element in gaining market share, engaging employees and raising capital,” as Bain & Co. noted in a recent report.
With investors and fund managers using ESG ratings to guide investment strategies, as documented in a recent MIT Sloan School of Management report, developers in the fast-paced life science industry have come under scrutiny. This isn’t surprising. After all, the life science ecosystem touches the lives of countless millions of people around the world daily. Life science companies, including their real estate developer partners, are under an ESG microscope from regulators, activists and the media.
A distinguishing feature of life science developers is that their assets—laboratories, production facilities and major life science campuses—are expensive, complex projects that take years to plan and build. Well publicized and highly visible to the surrounding communities, these projects can become a lightning rod from an ESG perspective. While it behooves every organization to apply ESG to their purpose, mission and operations, the bar for life science real estate developers and their tenants may be set even higher.
Clearly and transparently communicating ESG commitments and controls is the key starting point. In this effort, the developer must convey this information to investors, shareholders, local officials, regulators and community members.
As developers, we naturally start with the environmental impacts. Have potential issues or known problems been disclosed? What are we doing to ameliorate these environmental impacts? How have we operationalized environmental protection and sustainability?
On the “social” element of ESG, consider broadening your perspective. In 2021, we formed the Sterling Bay Diversity and Inclusion Council, a cross section of our C-suite leaders to meet regularly and explore ways to create more inclusive, creative and productive environments in life sciences and office buildings.
Going beyond diversity and inclusion, we’ve worked hard to communicate the positive economic impact life science businesses can have in an area—especially in underserved neighborhoods. Research has shown that life science developments facilitate job growth and greater business activity. Every life science job creates an additional 3.57 jobs to support it in the larger economy; 40 percent of these jobs employ workers with high school or GED-level qualifications; and every dollar invested in life science research increases business activity in an area by $2.43.
An ESG Checklist
A vocal commitment to ESG is one thing but operationalizing it can be daunting. At Sterling Bay, we’ve created a checklist to help ensure that our many activities conform to our public ESG goals, which in turn can be shared with stakeholders. The checklist includes:
- Adherence to the WELL Health-Safety Rating, a new standard for guaranteeing safe and healthy workspaces for occupants
- Achieving LEED certifications for our buildings, thereby showing a commitment to sustainable built environments
- Removing contaminated soil from sites
- Increasing our focus on other environmental issues, including but not limited to rainwater harvesting, green roofscapes, energy-efficient lighting, and alternative transit amenities
- Following the RESET Standard, the world’s first sensor-based, performance-driven data standard and certification program for the built environment that covers five stand-alone standards: Materials, Air, Water, Energy, and Circularity
- Committing to the economic well-being of the local community via partnerships with small, minority- and women-owned businesses
- Launching career development initiatives to bring young people into the industry and working with relevant associations and local schools to turn educational pipelines into employment pipelines
Now is the time for developers and science innovators to wrap ESG into their planning, positioning and execution. In our experience, this not only leads to the approval of ESG-oriented investors but it also provides an excellent foundation for long-term success and sustainability.
Suzet McKinney is principal & director of life sciences at Sterling Bay. The former Illinois Medical District CEO is also an educator at Harvard University and the University of Illinois at Chicago.