ESG- Responsible Investment & Real Estate

ESG- Responsible Investment & Real Estate

This year once again, World Environment Day on June 5th, served as a stark reminder that important changes are needed to increase awareness and action for protecting the environment.  With the ongoing pandemic, the core issue of sustainability has been brought back into focus; and is now high on the agenda of all stakeholders and not just the financial investors.  Investors and bankers are looking beyond the traditional financial indicators to assess sustainability, larger impact on community and environment before arriving at investment decisions. Thus, ESG factors are gaining importance while evaluating a company. ESG or environmental, social and governance refers to three central factors measuring sustainability and social impact of investment in a company. Adopting ESG model helps bridge the gap between risk management, improved financial performance and sustainable eco-friendly establishments.

Regulatory backing around the world has ensured that ESG is no longer a fad or a trend, but a must have and a critical component while considering any development, planning or investment. As per the World Economic Forum, the top 5 risks in terms of likelihood is increasingly being dominated by technological and environmental risks, while economic risks have relatively declined. It hence comes as no surprise that investors are increasing the use of ESG criteria to screen their investments and ensuring their managers and development partners are placing more focus on integrating and measuring portfolios across sustainability inputs. Financial risks are not decoupled anymore and a good sustainable portfolio has been proven to deliver a good risk adjusted return over the medium to long term.  It is understood that a significant proportion of global and institutional real estate investors have detailed quantifiable ESG policies in place and is a key aspect while considering an investment, with as much as         75-80% of the global assets in real estate investment expected to pass through an ESG filter. In fact, ESG-focused investing has grown to over US$30 trillion in assets and this allocation seems to be continually on the uptrend.

One of the most relevant asset classes which brings ESG into focus is real estate; not least because of the built environment being one of the largest energy consumers and also resulting in CO2 emissions. Driven by continuous engagement policies by all stakeholders, the sustainable focus has sharply driven up investment in green buildings and clean energy infrastructure. However, there still seems some debate and skepticism if such greener buildings tend to attract exaggerated premiums taking into account the higher upfront cost; but the key aspect here, is to evaluate the same over the life cycle of the building, as it is only then that the financial rewards outweigh the initial premium. Green buildings tend to have lower operational expense which increases the attractiveness for tenants and unlocks capital in the building. Other such examples can be observed by developers having environment friendly buildings with green (LEED/WELL/IGBC) certifications, energy-efficient appliances, and HVAC systems, that tend to perform better as compared to other buildings.

Public awareness and regulatory focus are also increasingly complementing the institutional investors engagement policies. The next challenge is how to avoid greenwashing and ensure that there is increased standardization on the ESG integration and reporting front. Being sustainable and efficient should be a standard, rather than a privilege of the select few. It must help bring together all the pieces of the puzzle for all stakeholders including investors, developers, buyers, tenants, vendors etc. Commercial real estate is going through a key phase in its ESG cycle. An efficient tracking and integration can benefit all the stakeholders in a meaningful manner, not only from a financial returns point but also from an environmental sustainability point of view.

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