What is ESG?
Importance of ESG for real estate industry
Measuring ESG metrics

Comment


Over the past few years, environmental, social and governance (ESG) issues have become increasingly important to real estate investors and business leaders generally. But to many, ESG remains a bit of a mystery. This article provides an overview of ESG and examines the ways in which it can lead to value creation in the real estate industry.

What is ESG?

Although "ESG" is undoubtedly the word of the day, it can be confusing because there is no one single definition. Rather, its meaning continues to evolve. Some see ESG as a progression of corporate social responsibility, while others see it as a shift to stakeholder capitalism.

A key to understanding ESG is looking at each concept – namely, environmental, social and governance issues – as an integrated set of concepts instead of three independent silos. It can be useful to define ESG as an enterprise-wide financial proposition – the discussion is being driven primarily by the institutional investor community coming from the public capital markets.

It is important for real estate professionals to understand that a significant amount of the capital that is deployed in real estate investments comes from major pension funds and other institutional investors. Knowing that such investors are increasingly interested not only in ESG, but also in measuring it, is crucial.

Importance of ESG for real estate industry

The business case for ESG and real estate investing is about opportunity, risk management, profitability and resiliency. Particularly in the context of real estate investment trusts (REITs), the capital market, real estate companies and institutional investors all require that ESG be part of the investment strategy. There is a desire to maximise asset value – not only for investors, but also for tenants, who can then maximise their own profit.

When it comes to real estate investment, the environmental aspect is clear – recent data suggests that 40% of global carbon dioxide emissions come from the real estate sector, of which 70% is from building operations and 30% is from construction. Buildings have also consumed 30% of the world's drinking water and 40% of raw materials. There are thus multiple drivers for the business case when it comes to the "E" part of ESG, and the metrics are fairly simply to evaluate.

Better conditions also increase property value, and landlords see higher rents from those better conditions. Commercial tenants in turn see employee productivity increasing through, for example:

  • the creation of social gathering spaces;
  • increased access to the outdoors;
  • increased air and light; and
  • increased access to other commercial areas and eating establishments.

In particular, studies have shown that the cognitive function of workers in "green" buildings is 60-100% higher, with some specific performance scores showing increases of nearly 300% compared with workers in non-green offices.

Emphasis on "healthy buildings" in particular has increased since the covid-19 pandemic, and interest in environmentally safe and healthy spaces resonates among both employers and employees. Since the shift to working from home, many companies are looking for ways to make their buildings more attractive to their employees.

These studies also highlight the integration with the "S" when it comes to employees' wellbeing, but the "S" is so much more. It will also be a focus for the real estate industry and an area to add value – whether it be the diversity of their own workforces, a resilient supply chain and focus on the human rights of those within its value chain and other human capital management issues. Finally, governance is the overlay that ties the "E" and "S" together. Governance is the underpinning to ensure that the ESG strategy is integrated with corporate strategy.

Measuring ESG metrics

Being able to measure metrics is key: if it is possible to measure, it is possible to improve. The institutional investor community is interested in being able to demonstrate through hard data and metrics that a company is addressing ESG issues in terms of how it is run and how it is investing.

The use of proptech is making it easier to capture such data. The real estate industry is employing proptech for a wide range of uses, including:

  • lead generation;
  • multiple listing services;
  • smart home tech;
  • construction;
  • energy monitoring; and
  • water monitoring and usage.

In terms of ESG in particular, proptech can be used to monitor the health and wellbeing of employees, air quality and carbon tracking, among other things. Such data is becoming more complex, and the technology behind it is only getting better.

Comment

ESG has an element of interdependence and shared values among organisations within a value chain. Organisations need to look to each other to see how they can advance their ESG goals and their strategies. In this regard, the real estate industry sits in a critical spot in terms of the overall landscape of ESG in that it is able to be a shared partner with tenants and communities, particularly with respect to advancing environmental goals. ESG, as a component of a corporate strategy, continues to grow, and it will undoubtedly remain a hot topic moving forward.

For further information on this topic, please contact Ameena Y Majid, Rebecca Davis, James O'Brien or Eric Greenberg at Seyfarth by telephone (+1 (312) 460-5000) or email ([email protected], [email protected], [email protected] or [email protected]). The Seyfarth website can be accessed at‚Äč www.seyfarth.com.