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The Financial Case for ESG in Commercial Real Estate

Increasingly, commercial real estate companies are under pressure to not only develop environmental social governance (ESG) policies, but also to disclose accurate information surrounding their ESG performance to investors, tenants, and other stakeholders. For many industries, including real estate, ESG is no longer just “nice to have”—it’s now expected, as many view it as on par with financial data.

“The shift from sustainability to ESG may seem sudden to some, but in reality, it’s the result of a consistent, developing swell of momentum over the last decade or two that has now reached critical mass,” Sara Anzinger, Senior Vice President, Capital Markets at Measurabl, said in a recent webinar.  

Anzinger and Eric Abramson, Customer Success Manager at Measurabl, broke down the fundamentals of ESG, delved into the market forces behind the shift from “green” to ESG, and explained the tangible financial benefits of adopting a data-driven, tech-forward ESG strategy. Though we recommend that you listen to the full presentation, here are some key takeaways. 

A Pathway to Better, Cheaper Capital

In many cases, ESG disclosure has gone from voluntary to mandatory, and it’s often linked to a company’s financial health in a much broader sense. Previously, businesses may have noticed that investments in energy and water efficiency, for example, ultimately helped them save on operational expenses. Now, high-quality ESG data and performance has become integral to raising capital and attracting and retaining discerning tenants. 

“ESG is no longer a special niche consideration for ethical investing,” Anzinger notes. “It’s now being systematically incorporated into investment analysis and decision making.” ESG data also underpins many of the traditional functions around a real estate transaction, acquisition, and lending due diligence as well as insurance underwriting. 

ESG is top of mind these days for not only investors, but also tenants and consumers. There’s a marked shift in tenant and consumer expectations—they expect a high degree of sustainability in the places they live, work, and shop. “High-quality tenants have indicated preference for quantifiable factors like water and energy efficiency for years now,” Anzinger notes. This will play out even further in the post-COVID-19 environment, she says, as health and wellness considerations like improved ventilation and floor plans designed to accommodate social distancing will become increasingly important. 

Sustainable Finance is Growing Exponentially

Enhanced financing options linked to strong ESG performance are steadily increasing. Though the COVID-19 crisis has certainly accelerated this trend, we saw considerable growth in this area prior to 2020. According to data compiled by Bloomberg, $465 billion in sustainable debt was issued in 2019, up 78% from $261 billion the year prior. And the real estate industry is well represented in sustainable finance: 30% of green bonds and loans were allocated to buildings in 2019. 

Read: Measurable Impact for Sustainable Finance

Global institutional investor demand for reliable ESG reporting is underscored by the UN Principles for Responsible Investing, which has at least 2,300 signatories with 80 trillion dollars in assets under management. GRESB, a leading ESG benchmark for the commercial real estate industry, was also an investor-driven initiative started by leading pension funds in Europe. 

Improved ESG disclosure benefits both lenders and borrowers in a number of ways. In the bond market, borrowers that can clearly articulate the impact of their ESG efforts may be able to realize a pricing advantage, sometimes referred to as a greenium, due to investor demand and oversubscription. Banks that offer green and sustainability loans extend sustainable finance options to borrowers that may be unable to tap into public capital markets, or may be seeking more flexible credit options. At the same time, lenders and investors that receive reliable ESG data disclosures can better discern their own risks and opportunities. 

Investment Grade Data is Key

With a collective distaste for greenwashing – overstating the sustainability of products, businesses, or assets – investors are increasingly demanding more accurate, granular ESG data to verify actual impact. Access to operational performance data on core metrics for real estate like energy and water consumption, waste diversion, and carbon output, for example, helps investors gain a much deeper understanding of a portfolio’s impacts on the environment and society. 

By requesting more accurate, granular ESG data from commercial real estate companies at both the asset and portfolio levels, investors are better positioned to align their investments with their values, adjust allocations to achieve better risk-adjusted returns, and support their own ESG disclosures. 

Investment grade data—defined as timely, accurate, complete, and auditable—is becoming more important to stakeholders. Green building certifications are still a proxy for good ESG performance, but it’s not always enough to look at the labels. Investors want to know how credible is the data underpinning an ESG score, rating, certification, or corporate sustainability report. 

For commercial real estate owners who have to collect ESG data from disparate sources across entire portfolios, obtaining investment grade data is virtually impossible to accomplish manually. “Automated asset-level data capture and disclosure or aggregation reduces human error,” Anzinger notes. “It also creates a virtuous circle—as your data quality improves, it also becomes more actionable.”

To learn more about the potential benefits of taking a digital approach to ESG, watch the full webinar, “Hitting Key Milestones Along Your ESG Journey.” You can also register for our next live virtual event on August 11, 2020, as we sit down with USAA Real Estate to discuss the company’s experience growing its ESG program with Measurabl.