Real Estate and ESG – What to Know

Contributor Image
Written By
Contributor Image
Written By
Dan Buckley
Dan Buckley is an US-based trader, consultant, and part-time writer with a background in macroeconomics and mathematical finance. He trades and writes about a variety of asset classes, including equities, fixed income, commodities, currencies, and interest rates. As a writer, his goal is to explain trading and finance concepts in levels of detail that could appeal to a range of audiences, from novice traders to those with more experienced backgrounds.
Real Estate and ESG – What to Know

Environmental, social, and governance (ESG) considerations are increasingly driving corporate strategy in asset classes globally.

When these issues impact policymaking the decisions of capital providers and allocators, they will impact prices, making them relevant to everyone’s trading and investing at some level.

But when it comes to developing real estate, is the environmental impact a critical concern for developers and investors and those involved in real estate (particularly carbon emissions)?

When we think about climate and everything involved in the environment, real estate might not be the first thing that comes to mind.

How important is real estate ESG in addressing the climate?

Even though so much of the focus of ESG has been on industries like transportation, real estate’s overall global footprint suggests it’s actually one of the best opportunities to address these issues.

Property and construction are about 40 percent of both global energy use and carbon emissions.

Accordingly, shifting toward more sustainable building and operating practices can have a notable impact on climate change outcomes.

What’s driving the demand and urgency for “green” buildings?

It’s really three things:

The first is there’s simply more support for more sustainability. It’s happened in the energy and transportation energies and is spreading to other areas.

Regulators and officials in cities around the world have also taken note of the impact property can have on emissions and the environment, and there are more demands on property owners.

For example, New York, Los Angeles, London, Paris, Stockholm, Tokyo, and many other cities are committing to carbon reduction.

New commitments mean new regulations for buildings to adhere to various efficiency and sustainability measures.

Nonetheless, the number of buildings that will be facing these new regulations and are likely to be unable to meet them is very high.

Second, tenants increasingly want their spaces to represent their values and they’re willing to pay the premium for “green buildings”.

Many tenants of commercial office space have committed to carbon neutrality or carbon reduction goals. So they may need their real estate to be consistent with that.

Shifting dynamics after Covid-19 may have led many office space users to proactively seek out more sustainable features in their space.

And finally, capital is increasingly being allocated (or reallocated) toward strategies that have a focus on ESG and sustainability.

As pension funds, endowments, sovereign wealth funds, retirement services companies, and other institutional clients make carbon commitments with their portfolios, this is going to drive more dedicated investment strategies toward sustainability.

That has already happened in public markets, but it’s also likely to play out in the private markets over the coming years.

And investors might make a case for premium valuations for “sustainable” assets, so you might expect more capital will therefore chase after that dynamic and benefit real estate ESG, which can create a flywheel effect.

Real estate ESG is in its early stages

There is a lot of interest and momentum around real estate ESG, but there’s still a long way to go.

The industry has made some progress in measuring and disclosing environmental impact, but there is still a lack of standardization.

This means that it can be difficult to make comparisons across properties or portfolios.

ESG is not just about the “E”

It’s also worth noting that real estate ESG strategies are often not just about the environment.

They also focus on social factors like inclusion and diversity as well as governance principles like anti-corruption measures.

So when we think about real estate and ESG, it’s important to consider the whole range of issues that come under that umbrella.

But given the size of the real estate industry’s impact on the environment, it’s clear that there is a lot of potential for real estate to make a difference when it comes to sustainability.