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ESG and Real Estate: Understanding the Financial Benefits

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ESG is an important topic for measuring and evaluating the overall sustainability and ethical goals of a business, company or portfolio, but ESG is more than an ideological concern. When deployed correctly, ESG strategies can reap significant economic benefits and rewards. Naturally, the core of any ESG strategy should focus on social good. However, research shows a positive correlation between ESG concerns and profitable financial returns.

Historically, adapting to new rules and regulations has been a financial burden for many businesses. Complying with specific environmental laws or following locally mandated guidelines on specific topics requires significant investment from CEOs and business leaders. But times have changed.

ESG, or Environmental, Social and Governance Strategy, is a set of metrics that measure a company’s overall sustainability, covering topics ranging from climate protection to employee rights. Social goodness, positive morals, and strong community-focused ethics are the key ESG principles that help us proactively work towards ESG compliance and invest time, effort and resources into the long-term sustainability of our business. Companies investing their money report better financial performance by comparison. For companies that are not actively working on ESG.

According to a report from Governance & Accountability Institute, more than 80% of companies in the S&P 500 publish their ESG performance. This number continues to grow year after year, and more companies are actively incorporating his ESG, which does not risk being left behind. Even if ESG is not an important part of your long-term business strategy, it should be.

ESG Benefits in Real Estate

The three pillars of ESG (Environmental, Social and Governance) cover a wide range of concerns. They are all of equal importance. However, there are two pillars of particular importance when it comes to adding value to a real estate portfolio or attracting new investment. environment and society. Since the real estate industry is primarily focused on material concerns, it makes perfect sense to focus on the environmental impact of buildings. However, the social component is just as important. Buildings can be made out of brick and mortar, but the overall well-being and productivity of the people who live and work within them is just as important.

Carbon control

The built environment is a major factor in the climate crisis.according to United Nations statisticsThe built environment accounted for 38% of all energy-related CO2 emissions in 2019, according to the report. The same report also says he needs to halve his CO2 emissions from the built environment by 2030 if there is a way to bring the existing building stock to net zero. Carbon target by 2050.

Material environmental issues are an important part of the future of the real estate industry. The environmental footprint of a building can be measured in many ways, from the total amount of carbon dioxide used to construct and maintain a building over its life cycle, to the daily consumption of resources such as water and energy, to the amount of waste produced. increase. produced.

A good example of a good business case for ESG in real estate is the measurement of energy consumption. in the United States, 40% of total energy consumed Located near residential and commercial buildings. This big number should underscore his importance of ESG and real estate in the fight against climate change. But reducing energy consumption to reduce utility bills and improve financial returns is just one part of his thoroughgoing ESG strategy. This should be obvious to portfolio managers. However, in addition to cost reduction, consideration for the environment is also required.

To proactively add significant value to their assets, property managers must look beyond the horizon and keep long-term sustainability in mind.

When it comes to the environment, this means many things. Of course, reducing energy consumption, reducing waste, using environmentally friendly and sustainable building materials, and other factors must be considered. But climate protection is an even more significant threat to the overall longevity and sustainability of the built environment. Buildings are constantly exposed to the elements, so future-proofing a building is of utmost importance.

Climate hazards such as sea-level rise, inland flooding, hurricanes, typhoons, wildfires, and other extreme climate events are becoming more common, and the frequency of these events is likely to increase in the future. Future-proofing your portfolio and optimizing your assets by conducting energy studies, infrastructure improvements, service upgrades, building certifications, etc. will certainly pay off in the long run, but today But it attracts a lot of investment.

Our commitment to ESG principles and future planning to address climate risks is highly attractive to shareholders and potential investors. Companies that can demonstrate their ability to identify and manage risks are viewed as forward-thinking, credible and socially responsible. These are important features for prospective investors. In fact, a 2017 study by the CFA Institute found that 65% of investors use his ESG measures and metrics as insights to help manage investment risk. In short, strong ESG performance is a compelling statistic for investors.

Social aspect

Emissions targets may be the biggest factor in the rise of ESG in the real estate sector, but they are not the only aspect to watch if companies are looking to add value to their assets and attract new investors. Climate-related articles may make headlines, but the social aspects of the built environment are just as important. A building may be an important asset worth protecting, but it only becomes a valuable asset if tenants want to live or work there.

The social pillar of ESG focuses on the needs of tenants, residents and local communities. From a real estate perspective, this means building accessible green spaces and functional infrastructure, establishing community projects, promoting and protecting tenant rights, and supporting other local businesses and philanthropic efforts.

On the surface, many of these “social” projects look like costly concerns with little financial return. But it’s not. Being proactive in improving your community can add significant value to your property. Tenant retention is a strong indicator of a business’s performance for potential investors, and fostering a friendly and socially good community attracts profitable tenants and drives higher property values. can produce.

Fortunately, social good often runs alongside environmental protection, and factors in the governance ESG pillar are also considered. Drive tenant demand and add value to your property, while enhancing your company’s reputation and giving it a competitive advantage in a morally and ethically sound way.

Why are ESG relevant to financial performance?

According to Architecture 2030 we are experiencing The greatest wave of urban growth in human history as the population is expected to grow significantly, and experts predict that 230 billion square meters of new floor space will be added to the world’s building stock. Relatively speaking, this is the equivalent of building an additional New York City every month for the next 40 years. From these estimates, it is clear that the real estate industry plays a major role in an effective net-zero strategy.

A construction boom of that magnitude is beneficial to the industry, but it must be done in an equitable, socially moral and sustainable way, especially if it is to reach its net-zero goal. Energy-efficient buildings powered by renewable energy are essential to achieving these goals. Without visionary policies and company goals, investors will overlook your company and favor other companies focused on building with all forms of sustainability in mind.

However, the only way to prove to investors and other stakeholders that you are ESG compliant is to take an initial measurement. Luckily, there are various ways a company can generate its ESG score. This is covered in detail in another article. However, for those looking for a reliable framework, companies like ENERGY STAR, LEED, GRESB and ECORE offer his ESG benchmarking tools, the most comprehensive in the industry. These services provide transparency for investors and give business leaders a complete roadmap towards their ESG compliance.

Why companies are taking ESG seriously

In summary, there is a clear correlation between ESG compliance, financial performance and investor attractiveness. ESG principles are essential to the viability and sustainability of a company or portfolio, but they can also generate revenue and add value.

Many important ESG principles have already been established within the real estate industry as they provide substantial economic benefits. Optimizing energy consumption, reducing water usage, and reducing other costs allowed property owners to maximize their returns. But the industry has evolved beyond these means, and these short-term gains are giving way to long-term strategies with far-sighted goals that go beyond short-term gains. Volatility, energy risk, water scarcity, reputational impact and the rise of social good are what tomorrow’s investors are looking for, and companies, business owners and asset managers are working hard to meet their demands. I have to.

Read our executive summary on ESG in real estate.

This executive summary on ESG in real estate covers the key things real estate decision-makers need to know from ESG compliance to leveraging ESG as value drivers in their real estate portfolios.

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