The Importance of ESG in Real Estate

Published on:
by Aaroshi Rathor
KnowESG Real Estate Investment
KnowESG Real Estate Investment

When we talk about ESG, generally what comes to our mind is companies and investors looking to adopt transparent environmental, social and governance aspects in their business strategies. We think of implementing the environmental aspect by cutting down carbon emissions to keep the global average temperature to 1.5 degrees Celsius, the social aspect as including diversity and equality within the company workforce, and the governance aspect in company policies and procedures that are fair and just and comply with evolving regulation. 

However, when it comes to the real estate business, it is a little difficult to demarcate where ESG can play a significant role in developing awareness among realtors. So, what is the importance of implementing ESG in the real estate sector? 

Investor Benefit 

Businesses are motivated, primarily, by profit. However, the pandemic dealt a huge blow to the real estate business, which has suffered massive losses with valuations decreasing and a slowdown of investing. Even in the pre-pandemic era, the real estate business was a major contributing factor towards climate change. According to a report by architecture2030, 40% of annual global carbon dioxide emissions come from the real estate sector. Almost 70% of these emissions are produced by building infrastructure, while the other 30% comes from the initial construction process. 

Investors have realised the importance of transitioning towards sustainability and are adopting an ESG mindset to hedge against future crises. Carbon reduction is one of the aspects that will help preserve asset value as customers buying properties are starting to prioritise those with a good environmental rating or performance. Another benefit for investors is in bottom-line operational cost reductions, energy efficiency as a component of carbon neutral objectives means lowered resource use. 

For example, Berlin-based Catella Residential Investment Management has developed the world’s first ‘energy positive’ impact fund designed to produce more energy than the building and tenants consume. So as a result, investors are helping in reducing energy consumption and achieving carbon neutrality while not bolstering investor returns in the long-run. The second major aspect of investor gain is by implementing ‘Green Leases.’ In order to effectively monitor the environmental performance of real estate assets, investors and tenants should opt for green lease agreements that help reduce waste, consumptions and emissions. According to research by Savills Investment Management, 73% of institutional investors expect green lease clauses being universally incorporated between tenants and real estate investment managers by 2029. So, going ‘green’ is the way to profitability in the long-term. 

Here lies the importance of prioritising sustainability, as global climate goals require a massive reduction in carbon emissions that can, to a significant degree, be made through implementing changes specifically within the real estate sector. However, while sustainability has become the main focus for investors, institutional investors require further assurances to deliver returns while ostensibly mitigating emissions. So, they have started to utilise software tools and collaborate to balance both. Carbon Risk Real Estate Monitor Project (CRREM) is an advanced tool developed in conjunction with the EU to help lower carbon emissions while providing investors with quantitative reporting of mitigation transition risks within real estate portfolios. It helps them provide sustainability strategies for new and existing properties while ensuring that the real estate valuation remains at an upward scale. 

Green Infrastructure 

Resource utilisation and energy efficiency have not traditionally been prioritised in the business cases supporting the building of either commercial or residential real estate. Energy profligacy has been the norm for a long time, resulting in immense pollution and deep, institutionalised energy ineffectiveness. Moreover, geopolitical shifts have revealed the precariousness of our  energy supply landscape, with price hikes leading to increased operating costs for facility managers. According to the European Union, it will require unprecedented effort from all sectors to reduce carbon emissions and become climate neutral by 2050, and the ‘Green Deal’ was developed to assist this, to boost the efficient use of resources and combat climate change in an effort both to preserve Europe’s natural environment while promoting and investing in new technologies. 

Talking about the importance of sustainable infrastructure investment, UN Secretary-General António Guterres said, “Infrastructure investment is a key tool for improving productivity, stimulating economic growth, generating decent jobs, addressing inequalities and building resilience. But infrastructure will only deliver on these objectives if sustainability is embedded at its core - increasing society’s resilience while reducing climate risk.” 

According to a report by “Green building materials global market opportunities and strategies to 2031”, the global green building materials market is expected to grow from USD 247.8 million in 2021 to USD 388.2 million in 2026, at a rate of 9.4%. The report further suggests that the market is expected to grow at a compound annual growth rate (CAGR) of 7.3% from 2026 to reach USD 552.7 million in 2031. The increase in demand for energy-efficient buildings and the awareness that real estate can utilise green building materials in residential and commercial space will eventually lead to a form of exponential growth in the green building sector, as traditional materials use is gradually overtaken by green approaches.

Another positive trend in built environment resource use is via Zero energy buildings (ZEBs). These buildings help in reducing energy consumption and greenhouse gas production as they produce energy through on-site renewables (solar, wind, etc.) along with overall energy use reduction through both highly efficient lighting, and heating,ventilation and air conditioning (HVAC) technologies. Greater market adoption of new tech reduces production costs, and just as many renewables costs are now cheaper than fossil options, chasing net-zero is becoming more feasible as renewables normalise and ‘traditional’ energy sources become comparatively more expensive or politically unstable. Creative solutions such as Akila’s ‘digital twin’ platform enables property managers to completely map an existing building, then digitally analyse all relevant components of the structure that are open to sustainable upgrade, thus providing exact data point mapping that permits visibility into any future upgrades that reduce resource use and costs.

Featured Article: (What’s The Difference Between SRI, ESG, And Impact Investing?) -------------

Implementing ESG in the  real estate sector isn’t greenwashing if a concerted, measurable effort is made to assess and use better performing materials or to reduce energy use. ESG is a necessity for investors because it represents technological evolution. Also, whether in the places we work or the places we live, the built environment is something we all interact with on a fundamental level. That interaction represents a significant opportunity to connect occupants with the possibility of more comfort, more environmental control, and visibly greater cost savings. 

This, coupled with the increasing availability of data-driven technologies that analyse the realistic potential for sustainability in buildings, whether for renovation or new build, means that the real estate sector has the capability to institute massive, systemic change that is of mitigation benefit. 

That’s the bottom line, and why ESG is the roadmap for real estate’s future.

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