In our first post of this two-part blog series, we examined the top two reasons that ESG will succeed where the green movement fell short: Data and The Market Demands ESG Disclosure. In today’s blog post, you will gain even more insight when you read about the remaining top three reasons: Regulation, Societal Influence and Technology.
Commercial real estate accounts for 18% of all carbon emissions and is already one of the most regulated industries. Real estate in its entirety (including single family residential) accounts for 40% of all carbon emissions, so it’s little wonder that governments – especially in countries that have signed the Paris Agreement on climate change – are increasingly choosing to regulate real estate companies.
Global sustainability policies are quickly evolving. In the European Union, ESG regulations like the SFDR (Sustainable Finance Disclosure Regulation) and the EU Taxonomy are changing the way companies do business.
While the United States hasn’t issued regulations requiring companies to disclose sustainability information, the Securities and Exchange Commission (SEC) announced in March that it is proposing ambitious, far-reaching climate disclosure rules, which will have significant impacts for publicly traded Real Estate Investment Trusts (REITs) and knock-on effects for private real estate.
If passed, the SEC regulations on climate risk disclosures will be a bold step toward regulating an area that has largely remained unregulated for too long. Most critically, “green” will become objective – every building on the planet can and should be placed on a spectrum in terms of its sustainability performance based on measurable, transparent data.
4. Society is Shaping the Real Estate Agenda
Our society is at a crossroads. “Doing well by doing good” is now a mantra for many companies in supporting employees, responding to social injustices and combating global climate change.
Buildings have an exponential impact, especially when you consider that even before the pandemic, the average person spent 90% of their time indoors. A building is a physical space we all utilize for work, life and play, and the social aspects of a building and how it is managed are increasingly important.
After the experiences of 2020 – pandemic-induced lockdowns and quarantines, and a renewed focus on inequality – investors are increasingly hungry for information about their real estate investments’ social responsibility. They want to be assured that building managers comply with workplace health and safety guidelines. They want to know that the air they breathe is being properly filtered. They want to be sure that there are no human rights violations or risks from the firm’s suppliers and contractors. Investors need to be assured that the building and its management operate in a way that is fair and equitable to all members of society.
The social dimension can be quite complicated and subjective. A consistent and data-driven approach can provide clarity and reassurance for occupants, operators, investors and regulators. Frameworks like those from the UN Principles for Responsible Investment (PRI) provide an important start for topics like diversity and inclusion and community involvement. There is certainly more work to be done.
5. Technology is Here
Much of the technology required to make a building sustainable exists today and has for a long time. Energy efficient light bulbs, solar energy, low flow plumbing fixtures, ENERGY STAR appliances and building optimization systems have been around for decades. These building technologies have the ability to collect usage data. What has been missing until recently is a way to derive and unite data from these disparate systems.
ESG technology that makes it possible to acquire, interpret and apply environmental data is readily available, and it has the ability to scale. With increased availability of data from building technologies and third party suppliers, we can now monitor and report on almost everything in real estate: energy management, building maintenance schedules, bill management, carbon monitoring, green certification, regulatory reporting and investor communications.
Yet previously, various technology systems could not easily interface. Before the advent of big data and integration technologies, ESG information was difficult to retrieve and collate, and doing so was a manual task. Measuring, managing and disclosing ESG data isn’t easy when it can’t be combined into a unified reporting system.
But now, we have sophisticated technology allowing companies to collect, measure and report upon their ESG metrics. Solutions are available that enable building owners and operators to make tactical and strategic decisions – everything from systems that monitor energy consumption or water usage to internet-connected sensors that can feed energy usage data from appliances into a building maintenance system. These systems provide an important governance structure to ensure decisions are aligned from the boardroom to the boiler room.
Real estate is a market of information. Those who have it succeed, and those who don’t fail. ESG indicators are as crucial as financial data in assessing a company’s health because they provide a more complete picture of a company’s operations, risks and potential over the long term.
It’s clear that ESG is an altogether different proposition than the green movement of the past. Green became ESG, and ESG is here to stay. The issues are more complex, the expectations are larger and more specific, and the cost of failure is higher.
To learn more about the ESG movement’s past and its promising future, check out my book, From Green to ESG: How Data-Driven Transparency Changed Real Estate for Good.