Investors focused on ESG have long argued that a commitment to sustainability could pay dividends. Now, with the EU putting a focus on standardizing ESG definitions through its Taxonomy Regulation, the German company alstria office REIT-AG has taken the idea somewhat literally.

As European companies and investors examine how their activities and potential actions could support the transition to a low-carbon, resilient, and resource-efficient economy, they may be forced to make decisions about projects that could make a substantive contribution to environmental objectives, but which do not meet their investment criteria. Faced with this very dilemma, alstria has put the decision to shareholders at the company’s annual meeting on September 29, offering a “Green Dividend” of €0.01 per share that is encouraged (but not required) to be invested in alternative climate-mitigation efforts. If shareholders reject the Green Dividend, the board will treat the result as “a clear mandate to invest outside the financial norms”.

The firm has a history of demonstrating ESG leadership in its industry, being the first real estate company in Germany to publish a sustainability report and one of the first in Europe to commit to transition to 100% renewable energy. However, after gathering the low-hanging fruit in reducing its CO₂ footprint through the renewable energy transition and incorporating sustainability considerations into its procurement and underwriting, it has found that the marginal cost of CO₂ reduction is now increasing sharply.

Approximately €1.8 million of the company’s 2019 net profits are earmarked to combat climate change, and the board has identified two projects within its portfolio where annual CO2 reductions are achievable. However, the board states that these projects are not viable if assessed solely on financial criteria, raising the question of whether the funds that would be required for these internal projects could, in fact, be more efficiently invested outside of the company and its industry.

The board is asking shareholders to decide. Proposed as an additional distribution on top of the regular dividend, the board argues that the Green Dividend would allow shareholders to “be in a position to invest the proceeds in a more efficient climate mitigation project.” If shareholders approve it, they would be free to invest the €0.01 wherever they choose, or not invest it at all. If the proposal is rejected, the company commits to invest the funds into the two most efficient internal CO₂-reduction projects that it has identified.

The company has provided extensive details, supported by projected costs and comparative industry data, to outline why the earmarked funds will make a more significant environmental impact if invested outside the real estate industry, and the dividend would provide investors the freedom to decide how to use these funds to meet their own sustainability objectives (alstria suggests renewables).

However, with freedom comes responsibility. Providing shareholders with funds under the assumption that they will research and invest in more impactful projects transfers the burden to them, and could result in even more inefficient capital allocations or no beneficial investments being made at all. While the company has gone to great lengths to frame the potential distribution in environmental terms, there are no formal mechanisms to ensure that the Green Dividend ultimately goes towards green causes.

The proposal also raises questions concerning what factors are included in companies’ financial assessments of certain environmental and social projects. For example, what time frames are being used and how are they valuing stakeholder considerations and potential reputational benefits from undertaking such projects? By focusing on financial criteria and passing the responsibility to invest in climate-mitigating projects, companies could potentially inhibit innovation and miss out on novel sustainability initiatives that could potentially increase long-term shareholder value. In addition, there’s the question of whether companies will limit the scope of ESG investments to reducing carbon emissions, or look at other areas that would present significant benefits. Too narrow a focus on climate mitigation could result in companies overlooking investments in, for example, human capital management or in enhancing stakeholder relationships.

alstria’s development of the Green Dividend concept demonstrates leadership and willingness to invest in carbon-mitigating projects – and raises a number of questions as to how potential investments in sustainability should be measured and compared. The proposal underlines the need for an effective framework to assist companies and investors in assessing the environmental sustainability of their economic activities.