ESG in the Built Environment:The Real Estate Industry's Growing Importance

Climate change has made it plainly obvious how certain businesses have turned a blind eye towards the environment for years. Even after so many pledges and virtuous display of corporate social responsibility, very few trust business to do right by the planet and society. The gravity of global challenges and the impact of business on them have brought environmental, social and governance (ESG) issues under intense scrutiny by all stakeholders - from shareholders and employees to customers and people at large.

Today, a company’s operations and growth prospects are closely assessed in terms of its ESG performance, irrespective of sector and size. However, the real estate sector is of special focus to the ESG agenda. ESG practices in real estate were fundamentally born out of necessity. But the theme of such practices should slowly move away from merely preventing damage, towards creating a positive impact and delivering solutions. 

Why ESG Should be Top of the List for the Real Estate Industry?

1. Real Estate’s Big Environmental Impact

We can safely say that investors’, customers’ and the general public’s heightened awareness on climate change in recent years is making ESG climb up the priority list for companies in just about every industry. And when you consider that buildings alone are responsible for a whopping 40% of the world’s carbon footprint, you already know where we need to pick up the most pieces!

The real estate industry, with its large-scale and complex system of assets for heating, cooling, lighting and other purposes, causes a significant amount of operational emissions and energy waste. Real estate establishments have a long lifespan and normally cannot be relocated, leaving them vulnerable to regional consequences of ESG risks such as stricter regulatory requirements, shifting preferences of society, and exposure to extreme weather events.

2. Global Commitments to a Net Zero Future

Commitments from governments and organisations around the world are increasing demand for the adoption of ESG initiatives by real estate companies.

World Green Building Council CEO Cristina Gamboa says

“We require a solution focused response to the urgent need to significantly reduce upfront emissions in buildings. We will accelerate action to achieve our goal of slashing embodied carbon by 40% by 2030 and securing net zero embodied carbon by 2050, in addition to our net zero operational carbon goals.”

The GlobalABC’s 2021 Global Status Report shows that real estate’s current efforts since COP21, will not be sufficient to achieve net-zero by 2050. Real estate even rose to its villainous status at the United Nations Climate Change Conference (COP26) in Glasgow earlier this year. There will be a special focus on the industry, as an entire day was set aside to address the huge implications of the built environment on climate change goals. Despite increases in energy efficiency, global building energy consumption and GHG emissions continue to rise and be locked in for decades. 

Also, building floor area is nearly going to double by 2050. Newly designed buildings are certainly more efficient, but 70% of buildings that will exist in 2050 have already been built, so decarbonising our current stock is a top concern. 

3. Greater Integration of ESG in Investment Decisions

In response to rising environmental challenges, commitments to net-zero targets, and evolving preferences of investors, real estate companies will undoubtedly have to make massive improvements in their ESG strategies. 

Investment decisions are becoming increasingly dependent on ESG factors. In order to make informed decisions, investors require information on how real estate companies are performing on ESG issues, catering to customer demands and meeting legislation. Therefore, building owners, operators and occupants clearly face the material dangers of climate change and potential future costs of lagging behind in sustainability measures.

The same report mentioned in the figure above finds that 74% of investors in UK commercial property think the importance of ESG credentials will increase over the next 12 months. 

What’s more, 81% believe it will become even more crucial over the next 3 years, highlighting how important real estate’s commitment to ESG is for investors.

But ESG in the real estate industry can be far more impactful. A report by Deloitte suggests that ESG integration among businesses and investors can serve as a key differentiator for real estate companies, improving reputation and as well as financial performance. The industry’s urgency for transformation presents an ideal opportunity for real estate to concentrate efforts on the “E” in ESG to drive long-term value creation for all stakeholders. 

ESG as a Value Driver for Real Estate

Real estate companies that perform strongly on ESG metrics can attract tenants who are progressively looking for efficient, healthy and green certified buildings. Beyond this, ESG-oriented companies can increase profitability through higher property values, tenant retention and improved return on investment.

The gap between green rental premium and brown rental discount is widening. There exists substantial evidence that green buildings command higher rents over equivalent non-green buildings. This indicates strong signals for a “brown discount” on properties with comparatively weaker sustainability credentials.

According to the World Green Building Council, better decarbonisation systems in buildings result in increased marketability, and play a major role in preserving property value. Such mitigation measures in real estate properties have also been found to save money by optimising asset use, leading to cheaper long-term operations and maintenance costs.

It’s About Your Bottom Line

Studies and real world examples have proven over and over again that good environmental practice is excellent for business. When done right, ESG initiatives not only address sustainability, but can also contribute to cost savings, social equity, tenant and employee health and well-being. 

• Sustainability has been linked to enhanced cash flow at the building level, 
• There is a direct link between portfolio sustainability and stock market success, 
• A link between sustainable buildings and greater profits for real estate investors. Returns are also starting to fall for companies that are reluctant or unable to disclose their ESG performance.

Leading real estate companies are proactively managing ESG-related issues, including climate resilience and the net-zero transition. However, there remains a considerable gap between global leaders and conventional businesses. Those who haven’t yet embraced ESG strategies must quickly get on track or they will risk falling behind. There is a crucial need for building analytics solutions to make buildings sustainable and smart.

If you enjoyed reading this article and want to take action, we want to hear from you! Get in touch via LinkedIn or send an email to chanchal chadha and we’ll be happy to talk.