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Environmental, social, and governance (ESG) as a pillar for the real estate industry

Environmental, social, and governance (ESG) as a pillar for the real estate industry

by Sudhakar Murthy, Head - Specialist Services Group, Embassy Services

Sustainability has to be a way of life to be a way of business” - Anand Mahindra

The real estate industry contributes to over 40% of worldwide carbon dioxide emissions. Building operations account for over 70% of these emissions, with construction accounting for the remaining 30%. Global and national climate goals necessitate a sharp reduction in emissions in both operations and construction, which can only be achieved through concerted efforts within the real estate sector.

According to 2020 research by Global Real Estate Sustainability Benchmark (GRESB), the share of investors who pay attention to sustainability has grown by 22 percent, strongly indicating that Environmental, Social, and Governance (ESG) standards will increasingly affect the valuation of real estate. Today, tenants, owners, investors, or even buyers have considerable power, and they not only expect high-standard buildings, compliant with contemporary market requirements, respecting local environmental issues and other compliance, but also demand appropriate development of land for bio-diversity, space for walkers, close proximity of various facilities or public transport, and more.

These value drivers provide a larger differentiation in performance prospects between assets with well-aligned ESG credentials and assets that fall short; they therefore are subject to value erosion risks by investors.

The importance of introducing ecological solutions such as reduced water or power consumption, high acoustic comfort, or ensuring access to daylight, invariably decreases operating expenses and improves tenant satisfaction.

The early adoption of adequate property management practices is crucial in each aspect of its operation as the impacts of ESG directly depend on measures undertaken by investors, managers, tenants, and ultimately even the users, each at their level of involvement.

It is imperative that all stakeholders, including the investors, have a proper understanding of the value chain of the properties, develop effective strategies, and drive sustainable change. Defining the ESG strategy with this knowledge will provide the management team with relevant insights to take action — and will also allow them to assess which initiatives will bring the greatest benefit to the entity’s shareholders and stakeholders. The question today is no longer if investors should consider ESG, but rather how they should start integrating it into their business and strategy. Much of this growth in global ESG-mandated assets is undoubtedly the result of rising client demand and disclosure regulations.

The GRESB, widely acknowledged as the leading international assessment and benchmarking tool for the sustainability performance of real estate assets, is developing a reporting tool to help companies simplify their disclosure efforts using data from GRESB Assessments. This will probably become critical in establishing benchmarking standards for the real estate industry.

Indeed, a number of real estate investment managers are already changing the game - largely due to client and investor demand and expectations, regulatory requirements, and the Sustainability Development Goals (SDGs). Whether investing in new assets, retrofitting existing assets to make them more valuable, or investing during the construction and development phase, owners and tenants are increasingly focused on assets that have green building certifications such as LEED and other certifications including Energy Star, WELL, and others, that contribute to healthier buildings and improved wellbeing for the people residing and working in them.

Now that we are trying to move out of the pandemic era, the threat of other global pandemics, climate change, the global water crisis, racism, gender inequality, and income disparity will continue to hinder progress and the sustainability of our planet. It is our duty to rebuild our systems and walk the talk. Proactive ESG techniques in real estate have to be prime movers on all fronts.

There’s no question that the ESG train is already moving ahead with speed - and invariably, investors and shareholders would do well to jump aboard sooner rather than later. Focus on ESG is vital in these efforts, as the building and construction industries account for roughly 40% of global carbon emissions. Notwithstanding, this industry has the capability to contribute significantly towards bringing these emissions down to net-zero as part of its ESG commitment strategy. With the global economy reliant on the availability of natural resources and human capital, doing good is not only an ethical choice; it is also the smart choice for investors. 


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