It’s as easy as ESG

Tackling the climate crisis is the global imperative of our time. The built environment alone generates emissions equivalent to 8.65 billion tonnes of carbon dioxide. Buildings, and associated emissions, contribute nearly 40% of all carbon emissions globally, creating mounting pressure on real estate to provide a green path forward.

Stepping into a more sustainable future brings huge challenges to the industry: as the so-called EU Taxonomy defines a comprehensive catalog of criteria for green investments, real estate will be held accountable to a variety of comprehensive disclosure obligations and will be expected to document progress with transparency.

It therefore comes as little surprise that investment portfolios are increasingly structured around sustainable criteria, meaning that ESG (Environmental, Social and Corporate Governance) compliance must now sit atop the real estate agenda. What’s clear is that the industry needs to realise that ESG is no longer something to consider, it’s a non-negotiable.

In short, the term ESG (Environmental, Social and Corporate Governance) summarizes all of the criteria that a (capital) investment must meet in order to be considered sustainable. It refers to what’s known as the “intangible assets” within the enterprise, meaning that ESG criteria present their own set of difficulties when it comes to evaluation (mainly because it’s hard to track and monitor the components that make up a robust ESG strategy).

To break it down:

Environmental relates to the reduction of energy consumption through efficient building technology or the responsible use of raw materials to reduce pollution, greenhouse gas emissions or generate energy efficiencies.

Social describes aspects of occupational safety and health protection, diversity or social commitment, including compliance with high standards of occupational safety and the creation of user-friendly areas.

Corporate Governance refers to responsible corporate management. Ie: adherence to compliance guidelines and close consideration of human rights.

ESG compliance within real estate doesn’t just mean that properties are sustainable, it also enhances their long term value. In short, the ‘better’ the building, the higher its value. However, in this instance, a better building doesn’t refer to having nicer doors, brighter rooms or higher ceilings: ‘better’ refers to how good the building is for both people and the planet.

The pressure on the topic of sustainable investments is growing among investors. In the future, real estate funds will be more closely scrutinized and negative sustainability will have a critical impact on the value of an investment. As the new Sustainable Finance Disclosure Regulations begin to take hold, asset managers and investment advisors will be forced to reveal the differing levels of sustainability integration and focus of each investment strategy that they offer. The regulation aims to create a more transparent playing field, in part to prevent greenwashing whereby some firms make false claims of sustainability.

In addition to all regulations, investors should be aware that “green” is not the only factor that ensures value stability. Not only does real estate need to be ecologically sustainable, it also has to meet specific user requirements or risk obsolescence. These factors combined mean that ESG information has never been more important, especially in a time when the majority of investors (98%) are signalling moves to a more rigorous approach when evaluating companies’ non-financial performance.

Digital technologies are crucial here – a survey by ZIA and EY found that 84% of respondents believe digitalization to be the key to the professional implementation of ESG guidelines. Without consistent digitalization of real estate and building operations, the real estate industry will not keep pace with the growing demand for demonstrable ESG targets and achievements, establishing ESG as a real game-changer when it comes to the future of the sector.

The good news is that there are already companies within real estate springing to action: the latest from Hines sees the US developer set up a dedicated, global ESG team under the leadership of Peter Epping in his newly-created role as Global Head of ESG, as the firm spearheads the industry’s efforts towards decarbonisation of the built environment via a robust ESG strategy.

How soon before the rest of the industry follows in Hines’ footsteps? I predict that it won’t be long at all – any company wanting to stay abreast of trends and ahead of the curve will be looking to ESG, not only because it’s the responsible course of action, but because it’s a surefire way of augmenting asset value whilst remaining relevant and safeguarding for the future.