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How ESG Impacts Real Estate

Real estate is traditionally profit-driven, with not much emphasis placed on sustainability. In recent years, however, the global mindset has shifted towards giving more value to ESG and sustainability standards especially by governmental organizations and capital markets. Real estate owners must follow suit. 

There is a growing belief that real estate plays a significant role in improving the quality of life and society by providing social housing, rehabilitating public spaces, and investing in more environmentally-focused infrastructure like green and sustainable buildings. Indeed, real estate is a unique asset class because it is an important component in all neighborhoods and communities, occupied by a wide range of users, and influences the character of the surrounding properties.

What Is ESG?

ESG short for Environmental, Social, and Governance is a set of factors used to assess how well a company integrates sustainability in its investments and policies. This has three major components: environmental, social, and governance.

Environmental

The environmental component assesses a company’s effort to combat climate change, decrease its carbon footprint, and invest in water conservation, renewable energy, and safe waste disposal.

Social

The social component of ESG takes a look at how well a company’s policies affect humans. These factors can include fair and equitable compensation, encouraging professional growth, great benefits, and building and maintaining an ethical supply chain.

Governance

Investors want to make sure that the management looks out for everyone, employees, stakeholders, and customers included instead of just for themselves. When examining matters of governance, it is typical for investors to take a look at, for example, the diversity of a company’s board to evaluate the governance component of ESG in a company.

Related: The Real estate Professional’s Guide to Getting Started with ESG 

Why Does ESG Matter in Real Estate?

The reason why there is increased scrutiny of real estate with regards to ESG is in part because of the large role it plays in the global carbon emissions: Buildings are responsible for 40% of the world’s energy and account for 30% of the world’s drinkable water consumption.

ESG is also used as a tool to assess and manage risks, allowing investors to identify material risks and opportunities to consider when acquiring assets and make informed business decisions. This risk management creates long-term value, drives sustainable financial performance, and elevates shareholder value.

With climate change influencing real estate markets all around the globe, successful ESG programs enable real estate portfolios to identify and manage risks and make informed business decisions derived from their findings.

Real Estate and Local Communities

With real estate playing a crucial role inside neighborhoods and communities, ESG programs create an opportunity for the real estate industry to foster more environment-friendly buildings and consider the social impacts of their investments, especially on underserved and marginalized communities. The industry needs to respond to these challenges by creating shared spaces or rehabilitating underutilized buildings into more vibrant venues.

ESG efforts also create rapport with local communities and reduce opposition to new real estate investments because of the elevated considerations for the well-being of the local community.  This in turn can reduce costly delays in the implementation of various real estate projects.

Investors typically take a look at how real estate makes communities feel safer and more inclusive. This may look like how a building respects local residents,  or by ensuring the safety of vulnerable populations whenever there are on-site activities. Examples of more community-centric decisions also include

●  Multi-faith prayer rooms

●  Hosting charity events

●  Allowing walkers to utilize buildings to exercise.

Aspects of community-building are heavily intertwined with real estate, especially in underdeveloped nations, since it provides access to basic and critical amenities such as energy and water. Hence, ESG is an invaluable component in decision-making with regard to infrastructure and development.

Related: How Commercial Real Estate Can Elevate the ‘S’ in ESG

Creating Better, Greener, and More Sustainable Infrastructure

ESG goes hand in hand with movements that seek to make the world greener. One example would be smart cities’ initiatives, which seek to integrate innovative technological solutions into urban areas. The data and statistics generated by these solutions enable cities to manage their infrastructure more efficiently. These ESG guidelines are now adapted by cities all around the globe, including Dubai and Singapore. Furthermore, this creates a better and greener transportation system and optimizes energy consumption, as well as water and waste management.

Real estate strategies have put more emphasis on reducing energy use in buildings. Some strategies include incorporating elements of passive solar design or using materials that regulate internal heat and humidity. The industry has also pivoted to repurposing buildings to become greener and more sustainable by installing shades and solar panels. Power-purchasing agreements also enable developers to minimize carbon emissions.

Certainly, these initiatives require an adequate amount of technology, like how the most advanced green buildings use a plethora of sensors (which use AI to monitor all parts of the buildings) and manage heating, cooling, and lighting, which assists in cutting the building’s energy costs and carbon footprint.

Looking Forward

As COVID-19 continues to reshape society and businesses, it is important to understand how real estate ESG will evolve in response. While it is true that economic and real estate activity is hampered by the pandemic, world events have also created an opportunity for investors to prioritize sustainable investments.

The most important factor to consider is how the pandemic has reshaped communities and the way they interact with each other. The frequent lockdowns and evolving health and safety protocols call for a reevaluation of existing transportation systems, technology, and health and wellness considerations for indoor environments.

All these realities push forward the urgency of prioritizing responsible and sustainable investments. Organizations and regulatory bodies all around the globe have recognized this need and are now either implementing or drafting measures to counteract the pandemic and even proactively address a future crisis.

The United Nations through the UN 2030 Sustainable Development Agenda outlined the 17 sustainable development goals which aim to achieve a more sustainable future. In the same manner, the European Commission developed its Action Plan on financing sustainable growth.

As more organizations and regulatory bodies understand the need to pivot toward sustainable development, coupled with the glaring possibility of another crisis, ESG standards will become the new normal in investing. The real estate industry knows that ESG is the key to sustainable investments. Hence, they have to make sure that their policies and funds are directed towards maximizing positive social and environmental impact.

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