ESG in Real Estate
Find out about the role of ESG in the real estate industry, plus a framework for measuring and reporting on it.
Importance of ESG in real estate
Environmental, social and governance (ESG) has become increasingly important in the real estate industry in recent years. This is due to a few reasons:
01
Rising awareness of climate change and environmental issues
Investors, tenants, and consumers are increasingly concerned about the environmental impact of real estate. They are looking for buildings that are energy-efficient, use sustainable materials, and are located in areas with good air and water quality.
02
Growing demand for social responsibility
Businesses are under increasing pressure to be socially responsible and to make a positive impact on the communities in which they operate. This is true for real estate companies as well. Investors and tenants are looking for companies that are committed to diversity and inclusion, that support local businesses, and that give back to their communities.
03
Changing regulatory landscape
Governments around the world are increasingly regulating the environmental and social impacts of real estate. This includes stricter building codes, taxes on carbon emissions, and requirements for companies to disclose their ESG performance. This is now mandated for certain companies in the European Union.
04
Opportunity for differentiation
ESG can be a way for real estate companies to differentiate themselves from their competitors. By investing in ESG initiatives, companies can attract and retain environmentally-conscious tenants, investors, and employees.
Role of ESG in real estate decision making
1. ESG factors in property selection
A number of specific environmental, social and governance factors are impacting property selection (see ESG framework in real estate below). There are also some broader things to look out for, including:
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ESG certifications: Seek properties that hold ESG certifications from reputable organisations, such as WELL Building Standard (WELL). These certifications provide independent verification of the property's commitment to ESG principles.
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ESG reporting: Assess the property management company's commitment to transparent ESG reporting. Look for regularly published reports that disclose their ESG performance, including energy consumption, water usage, and social impact initiatives.
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Continuous improvement: Prioritise properties that demonstrate a commitment to continuous improvement in their ESG practices. Look for examples of initiatives to reduce their environmental footprint, enhance social responsibility, and strengthen governance practices.
Performing ESG due diligence in real estate transactions is beneficial because it helps to:
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Identify and mitigate ESG risks: ESG risks can have a significant impact on the value and performance of a real estate investment. By conducting ESG due diligence, investors can identify and mitigate these risks early on.
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Differentiate properties and attract ESG-focused investors: ESG-certified properties are often more valuable and in higher demand due to their lower operating costs, higher occupancy rates, and stronger tenant demand. ESG due diligence can help investors identify and invest in these properties.
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Meet growing investor demand: Investors are increasingly looking for real estate investments that align with their ESG values. By conducting ESG due diligence, real estate professionals can show investors that they are committed to sustainability and responsible investing.
2. ESG due diligence in
real estate transactions
Impact of ESG on real estate market trends
The ESG movement has gained significant traction in recent years, with investors, tenants, and policymakers increasingly prioritising environmental, social, and governance factors in their decision-making. This shift is having a profound impact on the real estate market.
ESG's impact on real estate demand
Investors are increasingly seeking real estate investments that align with their ESG values. This demand is driving up the value of ESG-certified properties and creating a strong market for sustainable buildings. For instance, office buildings with LEED certifications can command a premium as compared to non-certified buildings.
ESG's impact on tenant preferences
Tenants are also becoming more discerning about the buildings they lease. Studies show that tenants are willing to pay more rent for buildings that offer a healthier and more environmentally friendly environment. For example, a study by CBRE found that tenants are willing to pay more for LEED-certified office spaces.
ESG's impact on property development
Real estate developers are responding to the growing demand for sustainable and socially responsible buildings by incorporating ESG principles into their development strategies. This includes designing buildings with energy-efficient features, using sustainable building materials, and incorporating amenities that support tenant well-being.
ESG's impact on real estate valuation
ESG-certified properties are now considered to be less risky and more valuable investments, due to their lower operating costs, higher occupancy rates, and strong tenant demand.
ESG's impact on real estate financing
ESG is also influencing the way real estate financing is structured. Lenders and investors are increasingly requiring borrowers to have strong ESG policies in place as a condition for financing.
ESG framework for real estate
Below is a basic framework that can be used to apply ESG to real estate businesses and transactions.
Energy efficiency
Operational efficiency
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Optimise energy usage by implementing energy-efficient lighting, appliances, and HVAC systems.
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Reduce energy consumption through building design measures such as natural ventilation, smart building automation, and daylight harvesting.
Diversity, Equity & Inclusion (DEI)
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Foster a workplace culture that promotes DEI in hiring, promotions, and employee development programs.
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Ensure tenant diversity by creating inclusive marketing strategies, accessible amenities, and respectful community spaces.
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Engage with the surrounding community to address social issues and promote equity in access to resources and opportunities.
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Establish efficient processes for managing tenant issues, maintaining building systems, and ensuring compliance with regulations.
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Minimise disruptions and inconveniences for tenants by proactively addressing maintenance needs and resolving issues promptly.
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Implement data-driven decision-making to optimise operations and improve resource management.
Conduct regular ESG assessments
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Conduct regular self-assessments and external audits to evaluate the company's ESG performance.
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Identify areas for improvement and develop action plans to address identified gaps.
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Communicate ESG progress to stakeholders through transparent reporting and stakeholder engagement.
Financial transparency
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Maintain transparent financial reporting and disclosures to ensure stakeholders have access to accurate information.
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Adhere to ethical practices and financial regulations to maintain a strong reputation and attract investors.
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Implement risk management strategies to mitigate financial losses and protect shareholder interests.
Sustainable building materials
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Source materials from sustainable and renewable sources, such as recycled materials or locally sourced timber.
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Use materials with low embodied energy, such as those with low carbon emissions during production.
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Design buildings with durability and adaptability to extend their lifespan and minimise waste.
Establish ESG goals and metrics
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Set clear and measurable ESG goals for each area of the framework, such as energy consumption reduction, water usage efficiency, or social impact initiatives.
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Track progress against these goals using relevant metrics and performance indicators.
Water conservation
Workplace wellness
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Create a healthy and supportive work environment that prioritises physical and mental well-being.
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Implement ergonomic furniture, comfortable workspaces, and access to natural light and fresh air.
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Encourage healthy lifestyle choices and provide wellness programs and resources for employees.
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Implement water-efficient fixtures, rainwater harvesting systems, and leak detection programs to reduce water consumption.
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Integrate water-sensitive landscaping and native plant species to minimise water usage and enhance water quality.
Community engagement
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Partner with local businesses, organisations, and community groups to support social initiatives and address community needs.
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Provide opportunities for employees and tenants to volunteer and participate in community service activities.
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Promote social cohesion and mutual understanding among different groups within the community.
Climate change resilience
Sustainable procurement practices
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Prioritise sustainable sourcing of materials and services for construction, maintenance, and operations.
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Support local businesses and suppliers that align with the company's ESG values.
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Implement waste reduction and recycling programs to minimise environmental impact.
Promote ESG culture
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Foster a culture of ESG awareness and commitment within the organisation.
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Provide training and education to employees on ESG principles and practices.
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Encourage employee participation in ESG initiatives and community engagement activities
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Assess the property's susceptibility to climate change-related hazards, such as floods, wildfires, or extreme weather events.
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Implement measures to mitigate these risks, such as flood barriers, fire-resistant materials, and climate-responsive building designs.
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Develop contingency plans to ensure business continuity during extreme weather events, including evacuation protocols, alternative power sources, and supply chain redundancies.
ESG reporting & disclosures in the real estate industry
01
Transparency
ESG reporting and disclosures help to improve transparency and accountability for real estate companies. This can help to build trust and credibility with investors, tenants, and other stakeholders.
02
Benchmarking
ESG reporting and disclosures allow real estate companies to benchmark their performance against their peers and industry standards. This can help them to identify areas for improvement and to set ambitious goals.
03
Investor attraction
By publishing ESG reports, real estate companies can attract ESG-focused investors and demonstrate their commitment to sustainability and responsible investing.
04
Compliance
If you’re based in the European Union, the CSRD now mandates ESG reporting and audits for large companies.