ESG in Practice: Implications in Real Estate
How ESG relates to the key components of the Real Estate industry?
It was mentioned in previous blog posts that ESG primarily applies to two categories of Real Estate: development and investment. Development is primarily focused on construction, architecture, and the other physical aspects of Real Estate, whereas investment applied to the purchase of assets, and inward and outward investments in Real Estate.
As such, the following sections will highlight the correlation between ESG and various aspects of the vertical Real Estate industry, and how ESG impacts these components.
Environmental performance is an important tool for Real Estate, because it measures the overall efficiency, energy performance, carbon output, and carbon offset of a construction or Real Estate project. In simpler terms, it refers to how carbon-friendly and ‘green’ a Real Estate project can be. In this regard, ESG provides a framework of knowledge and tools (through organisations such as BRE, GRESB, and others) to be able to measure and understand the overall environmental performance of a Real Estate project.
In other words, ESG allows Real Estate companies and professionals to more accurately track, report, and monitor the environmental performance of their construction assets. However, the tools, resources, and criteria of ESG also allows Real Estate companies to monitor the connection between the environmental performance, and social and governance aspects of the business. That is, ESG criteria provides businesses with the ability to draw correlation between how an improvement in the environmental performance or energy efficiency of green buildings can affect the company’s performance, availability of products, and overall impact on communities.
In short, ESG criterion have an immense correlation with the environmental performance of Real Estate assets, as they allow businesses to understand how the construction of certain assets impacts the environment, local communities, and the company itself.
Although somewhat like the correlation between ESG and environmental performance (energy performance, efficiency, and carbon output of construction projects), there is indeed another correlation between architecture (architectural design) and ESG. Industry sources and studies have found that this relationship lies in the fact that ESG criteria and structures allow architectural firms to better design homes and other construction projects prior be being built.
In other words, ESG has led many architects and architectural firms to begin to create more green designs and buildings, as well as to create designs and Real Estate projects that have positive impacts on governance and communities. This is achieved by those architectural firms proactively incorporating ESG guidelines and criteria into their operations and mandates, and creating designs that are more cost-effective, community-based, and beneficial to the environment than has been seen in the past.
Although much of the correlation between design, architecture, and ESG is based on the environmental aspect of ESG; there is a correlation nonetheless, which has tremendously positive impacts on the environment and global communities.
As has been alluded to throughout this article, investment is one of the most significant areas in which ESG has a positive impact. This is because Real Estate investments correlate closely with ESG criteria and can have profoundly positive impacts.
First, ESG criteria allows for Real Estate investments to positively affect the environmental impact, design, and overall energy efficiency of Real Estate projects and homes. Real Estate firms can “explore green energy solutions on a per-property basis” and allocate funds to improve environmental impacts of Real Estate investments and projects. For example, Real Estate companies can invest in more green solutions, designs, and components of homes to better impact and environment over time. Additionally, leveraging partnerships and resources such as those provided by PCAF helps businesses improve their investment transparency, and have more environmentally beneficial investments.
In terms of the social impact, more sustainable investments allow businesses to proactively create social impact, such as giving back to communities or creating financial partnerships with social enterprises. In addition to this, Real Estate companies can also use ESG-based investment strategies to invest into community-based projects as part of their business model—such as investing in low-income or attainable housing.
Finally, in terms of governance, Real Estate businesses can track and monitor their investments—to ensure financial transparency—using a variety of the previously-mentioned tools to improve their governance and corporate social responsibility. Organisations can also invest in business models, tools, and resources to help improve governance in other ways, such as having more diverse hiring strategies, implementing greater cybersecurity measures, better managing executive salaries, and implementing positive tax strategies to benefit the organisation, its stakeholders, and local communities. In short, investment is a tool that very closely correlates to ESG practices in Real Estate and is one of the most important to be used in ESG.
“Green buildings may become the new normal, compressing the market into one where a brown discount is put onto buildings struggling to meet new energy standards.” MSCI ESG Trends to watch
ESG relates to construction similar to the way it relates to design, architecture and other aspects of development. That is, the correlation primarily lies in the environmental impact of construction, but there are some societal impacts on top of this. However, the key correlation between construction and ESG is that construction can utilise ESG criteria to build greener homes, and utilise products and partnerships.
This includes leveraging investment partners to practice greener construction of homes and properties, and to leverage other tools to ensure every step of construction supply chains and build processes is more environmentally sustainable. This correlation also extends to the ability of Real Estate companies to ensure that every part of the construction value chain and supply chain actively promotes carbon offsetting, more environmental practices, and positive social benefits and good governance.
According to industry sources, the relationship between ESG and construction relies on other relationships and implementations of ESG, such as by investment and architecture. The outcome of this is more sustainable and environmental-sound builds, more positive social impacts, and better governance of construction supply chains.
HOW AB ARCHITECTS CAN HELP
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