Integrating ESG in Real Estate

Environmental, Social, and Corporate Governance (ESG) is slowly gaining prominence across industries. Real estate has been a late adopter of this concept, but global warming concerns and net zero commitments have accelerated its acceptance within the industry. Real estate companies across regions are embedding ESG practices within their processes. Investors and financial firms also consider it important. ESG is set to become an essential requirement and become an integral part of Real Estate processes.

ESG is a set of principles and standards that guide companies to operate responsibly and sustainably. It focuses on reducing emissions, improving energy efficiency, and creating a healthy environment for everyone. ESG covers a broad range of themes, from determining and assessing a company's carbon footprint to its internal rules and culture covering human resource management, business ethics, and diversity. ESG in real estate is becoming increasingly important to reduce the negative impact of construction on the environment.

Why ESG

ESG is needed in real estate to ensure that buildings are constructed with sustainable materials, use renewable energy sources, have net zero emissions, and are built with the highest standards of energy efficiency and safety in mind. By following these principles, real estate developers can help create a sustainable future for everyone.

ESG also supports business practices that encourage workplace health, inclusion, diversity, and wellness, and corporations are broadening their perspective on social responsibility. It suggests considering community's influence when deciding on future developments.

In real estate, the ESG principles focus on the following:

Environmental

• Procurement of materials and resources
• Energy sources and efficiency
• Waste management
• Air quality

Social

• Occupier and community relations
• Health and well-being of workers and residents
• Safety and accessibility

Governance

• Company culture
• Diversity
• Reputation
• Conduct

Global adoption of ESG in Real Estate

• US – The real estate industry in the US has increasingly adopted ESG practices. Companies are adopting energy-efficient technologies to reduce air pollution during construction and promoting sustainable measures. For instance, a realty trust company with presence in New York, Chicago, and San Francisco has nearly 23 million square feet of LEED-certified buildings under management, and in 2019 it was given the Sustained Excellence Energy Star Partner of the Year Award.
• Europe – The European real estate companies have been at the forefront of adoption of ESG practices. The investors in this region are favoring companies that have ESG principles as part of its processes. Following are some examples of European companies:
  • A German real estate company, headquartered in Bochum, North Rhine-Westphaliais, focusing on sustainability and social responsibility by undertaking initiatives to reduce carbon footprints and enhance the quality of life for its tenants.
  • A Paris-based real estate company, is committed to sustainability and has set targets to reduce its carbon footprints and increase the use of renewable energy.
• Asia – Asian countries have also recorded a surge in adoption of ESG practices. With sustainability as the main objective, real estate companies are integrating the ESG thought process within their framework. Some examples are listed below:
  • A Singapore-based real estate company made sustainability a key part of its business strategy. It has implemented green initiatives across its properties, including energy-efficient building designs, water conservation measures, and renewable energy installations.
  • A Hong Kong-based real estate company adopted various ESG practices, including implementing energy-efficient building designs, using renewable energy, and reducing waste. The company also invested in other green buildings and sustainable development projects.

Benefits

• Investment opportunities – Investments in real estate are being increasingly influenced by sustainability. Organizations like the European Association for Investors in Non-Listed Real Estate Vehicles (INREV) provide a platform for investors to exchange ideas and collaborate on ESG-focused real estate investment strategies. Additionally, frameworks like the Global Real Estate Sustainability Benchmark (GRESB) are helping listed real estate companies measure and report their ESG performance, providing investors with greater transparency and accountability.
• Social impact - ESG considerations can create positive social impact by promoting social equity, diversity, and community engagement. For example, real estate companies can incorporate affordable housing units into their developments or invest in community programs that benefit residents.
• Infrastructure development - For developing nations, putting in place an effective ESG-focused infrastructure system is essential because it gives the local population access to necessities like energy and water. Furthermore, it might support developed nations in addressing issues like the growing urban population and environmental worries. ESG criteria are shown to be important in infrastructure closures.

ESG considerations have become increasingly important in the real estate industry worldwide as countries are adopting policies to encourage sustainable and responsible practices in the sector. The benefits of implementing ESG principles in real estate are clear and varied, including low costs, improved asset value, reduced risks, and enhanced reputation. Investors and other stakeholders are increasingly demanding ESG framework making it a key driver of value creation and long-term success in the industry. As a result, real estate companies that embrace ESG principles and integrate them into their operations are likely to be better equipped to handle the future challenges and generate sustainable returns than the ones that do not.