Ever since the Paris Agreement made back in December 2015, real estate has been giving more importance in advancing sustainable development in order to achieve zero carbon emissions by 2050. As part of the efforts to implement this, real estate owners, investors, and stakeholders must recognise their fiduciary duty to understand and actively manage environmental, social, governance (ESG), and climate-related risks in their management and processes.
As COVID-19 brought its health crisis and social unrest in 2020, it has also brought this urgency to the real estate industry to decrease pollution and improve sanitation systems in efforts to bring sustainability at the forefront.
According to Urban Land Institute (ULI), the real estate industry will take a more focused view on ESG strategies for 2021. As much as this poses new challenges to the industry in terms of measuring portfolio risk, value, and performance, it also reinforces how much of real estate is entwined with a lot of aspects in people’s lives.
Currently, the buildings sector contributes approximately 40 percent of the global carbon emissions. The carbon footprint comes from both building operations and building materials. In order to mitigate emissions, emphasis must be placed on both. With this, governments around the world are fostering new construction methods using eco-friendly materials and smart technological heating or ventilation.
Moreover, energy efficiency in buildings remains a highly prioritized feature to be given by tenants, owners, managers, and developers. Commercial tenants take up an average of 40 to 70 percent of the total energy consumption in buildings. Collaboration among tenants, building owners, and service providers is highly emphasized with the goal of conserving energy and reducing energy costs. This is to make buildings healthier and more energy efficient so as to not negate the effects of reducing carbon emissions from the point of construction.
There is currently an increased appetite for ESG investments as sustainability has become more vital for real estate investors. An indication of this is their increased participation in the 2020 Global Real Estate Sustainability Benchmark (GRESB) assessment. GRESB is an investor-driven global ESG benchmark used for private property funds, developers and investors that directly invest in real estate, and listed property companies.
GRESB is becoming more popular recently because it allows for easy evaluation of the property. Having good GRESB scores gives confidence to investors that the asset is compliant to ESG standards.
While GRESB is arguably the main basis of ESG compliance, a newer standard relating to climate change is emerging known as CDP, formerly known as Carbon Disclosure Project. It is a standard with regards to the companies’ net-zero-carbon strategies. It is predicted that for the succeeding years, questions on net-zero-carbon strategies will be more eminent as more investors choose to pursue programs that reduce carbon emissions.
The impact of ESG on real estate goes beyond just the environmental aspect. As aforementioned, real estate affects many aspects of people’s lives. ESG also considers the impact of properties on its community. Currently, there is a heightened emphasis on health and social equity. Health and well-being certifications are being widely sought in order to assure building users that their properties are safe for occupancy.
Furthermore, land use, zoning, and location of public amenities are becoming increasingly critical in order to better distribute equity. With this, one of the major obstacles for investors is to cater to the needs of the local community with their investment model.
Responsible real estate investment incorporates strategies that integrate ESG factors and climate change risks. Identifying and managing ESG issues across an asset portfolio will protect and enhance investment value as ESG will increasingly shape and influence the real estate valuation for the years to come.
For more real estate news and insights, visit our website here. Follow us on Facebook and Instagram for frequent updates on real estate and lifestyle news and inspo.
Sources:
Da Cunha, F., & Coimbra, F. (2021). Real Estate Predictions 2021 (Rep.). Retrieved April 21, 2021, from Deloitte website: https://www2.deloitte.com/nl/nl/pages/real-estate/articles/real-estate-predictions.html.
McCandless, M. (2021, January 22). Top 10 Sustainability topics for real estate in 2021. Retrieved April 21, 2021, from https://facilityexecutive.com/2021/01/top-10-sustainability-topics-for-real-estate-in-2021/.
PRI (2016, February 25). Sustainable real estate investment: Implementing the Paris climate agreement. Retrieved April 21, 2021, from https://www.unpri.org/real-estate/sustainable-real-estate-investment-implementing-the-paris-climate-agreement/138.article.
PwC and Urban Land Institute (2020). COVID-19 Boosts Environmental Agendas. In Emerging Trends in Real Estate® Asia Pacific 2021 (pp. 17-18). Washington, D.C.: PwC and the Urban Land Institute.