Environmental, social, and governance (ESG) is no longer a niche topic in commercial real estate but rather a key factor in growth. Its criteria shape stakeholders’ analysis and decision-making processes. Furthermore, COVID-19 has accelerated the emergence of ESG principles as the new basis for business operations and corporate responsibilities, emphasizing risk management, sustainability, transparency, and social participation. ESG is the beacon that investors sail toward, on a current too strong to resist.
Investors carefully consider these non-financial factors to boost their long-term portfolio outlook and align with community and industry values. At the same time, tenants in almost every industry now prize these values in order to meet their employees’ expectations, impress potential talent, improve their public image, and gain a competitive advantage.
Given that ESG now forms a cornerstone of most operations in CRE, it is only natural we explore its impact on our market.
The core elements of ESG principles and rising awareness
The “environmental” criterion involves climate change impact or the measurement of buildings’ carbon and other greenhouse gas emissions, as well as the environment’s influence on construction and operations.
“Social” includes interactions of elements in society that affect individuals and communities. Inclusion, diversity, health, safety, relationships, and affordability are all demands that CRE firms are ethically expected to address.
The term “governance” entails the structure and behavior of an economic entity. To illustrate, investors will observe a company’s commitment to transparency, diversity in management, equitable compensation, and other related ethical concerns.
The definitions aside, owners’ and managers’ desire to prioritize ESG elements in CRE has increased in the last few years. This newfound dedication is a practical manifestation of the almost universal acknowledgment of climate change and the ominous risks it carries. It has prompted investments in green buildings and clean energy infrastructure around the world. Regulators have also been devoted to solving ESG challenges by enacting stronger laws and raising standards.
The impact of ESG principles in CRE is profound
Both building and construction account for 39% of global carbon emissions, with operational emissions generating 28% of these while building materials contribute the remaining 11%. These unhealthy by-products of the built environment motivated the United States to commit to cutting carbon emissions by half by 2030.
Nonetheless, our government’s well-intentioned intervention has shifted business priorities and altered markets far and wide, with participants reacting to harness the possibilities that accompany the new dynamics.
Investors respond to this ESG-predicated accountability by paying more attention to ESG factors when evaluating properties. Colliers sought data to corroborate this paradigm, reporting that over 75% of investors are incorporating environmental fundamentals into their approaches.
And naturally, firms react by investing in and implementing these practices to command greater attention. Integrating ESG components enables CRE companies to increase asset value, lower risk, and expand access to long-term finance. Adhering to ESG guidelines also promotes more efficient project execution on a local, regional, and national level. ESG is, therefore, now a critical tenet of CRE, delivering numerous benefits to companies that predicate their operations on this set of standards.
Incidentally, the pandemic has undermined optimism for the future of office spaces. Considering that a large portion of the population now works remotely, operators and employers who advocate for the reinstatement of the traditional in-office work model must navigate the evolving ESG expectations when developing and operating these spaces.
The ESG horizon: Exploring the outlook
Demand for ESG-related real estate investments is growing. Prior to the pandemic, about 25% of global assets under management were evaluated from a sustainability perspective. Over the next few years, though, this ratio is expected to rise to at least 75%.
ESG-driven assets have become a strategic priority for many investors, business owners, regulators, and tenants. Recent polling revealed that 55% of the 100 most valuable REITs are now disclosing their ESG targets, with 46% of them expressing both clear carbon and sustainability objectives. To put it another way, ESG integration is already a critical component of CRE, and its importance is poised to multiply tenfold.
An effective initial ESG adoption measure for CRE firms includes creating a roadmap that establishes an ESG strategy with clear, measurable, and attainable goals addressing each core principle.
With that, it is crucial for CRE firms’ effective governance, transparency, and long-term value creation to maintain accurate monitoring and reporting in each ESG factor.
Giant Strides: Watching ESG’s rapid adoption
ESG has evolved from an afterthought into an indispensable set of guiding principles and criteria that influence the decision-making processes of all CRE stakeholders.
Socially conscious investors employ this set of standards to assess the broader environmental, social, and governance merits of potential investments. In response, a CRE firm must adopt these practices to assure investors of the security and performance of their investments.
Today, ESG principles are increasingly integrated into corporate culture and operations, as well as into public reporting and performance disclosure. From where we stand, these three factors constitute an essential framework for CRE industry players to ensure access to capital, support, and talent.