Exploring the Impact of ESG on Real Estate
- Jul 25, 2023
- Amy Menist
While the demand for real estate continues to grow, the need for environmentally conscious efforts and sustainable innovation, have become ever more prevalent. ESG is a framework that can be applied to any industry, particularly the real estate industry.
The environmental aspect of ESG represents a real estate owner’s responsibility to assess property vulnerabilities, resilience, and defense with respect to its climate, and to also investigate the environmental impact of operating the property. In other words, not just what the property consumes, but also what it puts out. It's important for real estate players to understand the climate-related impacts on asset performance and value.
The real estate industry is directly connected with climate change. Properties both suffer from damage caused by climate change, while simultaneously being one of the greatest contributors to it. Climate change has caused an increase in, and is expected to worsen, the frequency and intensity of severe weather-related events, such as hurricanes, droughts, wildfires, extreme heat or cold, blizzards, and extreme precipitation and floods. These severe weather-related events have a direct negative impact on real estate. They damage real estate properties, causing increases in repairs and maintenance, insurance premiums, and utility and operational costs, all of which will require higher capital expenditure. This directly correlates to a decrease in the value of a property and liquidity. Owners and companies can be proactive about mitigating risk from severe weather-related costs and losses by evaluating the environmental impacts on a property and assuring proper protocols are in place to protect their assets. In addition to directly benefitting the property itself, implementing ESG and sustainability policies will reduce contributions to climate change overall, which could collectively reduce the frequency and intensity of severe weather-related events.
The real estate sector is one of the leading contributors to climate change. Currently, the total GHG emissions attributed to the construction and operation of real estate account for 39% of the total global GHG emissions, outweighing both the transportation and industrial industries. Additionally, the real estate industry consumes over 40% of global energy annually. Furthermore, approximately 100 billion tons of waste is caused by construction, renovation, and demolition of real estate globally, with 35% sent to landfills. All of which contribute to climate change. As a result, governmental policies are being implemented with net zero targets set for new construction by 2030 and retrofitting of all preexisting buildings “standing investments” by 2050.
Using a variety of tools, owners can establish and track key environmental factors associated with property development and operations, including the amount of energy consumed, the output of greenhouse gas emissions, the usage and/or possible contamination of water, the amount of waste generated and/or avoided in favor of recycling initiatives, as well as the building’s impact on air quality, the surrounding ecosystem and natural resource preservation. By evaluating each individual property’s environmental impacts, real estate owners can be proactive about mitigating risks associated with climate change and limiting its impacts on the environment.
Strong ESG policies and procedures can help build trust, attract buyers and/or renters, and prevent costly mishaps while meeting community needs. Today, it’s important for real estate companies to evaluate their social actions as employees are demanding ESG services and better working conditions. These include demands for ensuring diversity, equity, and inclusion throughout the business and governing board; developing ways to attract, retain, and promote employees; and implementing an effective code of conduct. Businesses today excel from the use of strong social responsibility practices because they incorporate diversity and inclusion, recruitment, talent development and mentorship programs, as well as health and wellness, and create a conducive working environment for everyone throughout the company.
Buyers and renters today are also considering ESG and sustainability initiatives as a deciding factor for their tenancy as they want to rent high-performing spaces in a socially responsible environment. Therefore, it is imperative to evaluate a property’s social efforts with respect to the surrounding community. This could include evaluating affordable housing with accessible space, quality public transportation and access to and from the property, as well as equal access to features and amenities within the community, including good schools and shopping centers.
ESG is metrics-based with documented evidence. Strong governing practices are necessary to help real estate companies report and oversee its business performance, track progress, and strengthen data management and analytics. Management has a responsibility to implement the ESG policies and procedures as well as maintain and evaluate its progress and standards. Therefore, governing practices need to be in place to enable the company to perform due diligence and collect data and documentation to further improve planning efforts.
Investors and lenders also expect companies to track their environmental and sustainability metrics at the asset level, and to provide transparent reports that support the process for making meaningful and effective ESG plans. Through use of effective governing practices, management can perform decisive analytics, track progress, and create accurate and transparent reports on its corporate social responsibility and ESG efforts that showcase sustainability evidence to attract investors, lenders, buyers, or tenants.
ESG practices are becoming an increasingly significant topic for real estate owners and businesses, and a crucial investment criterion for real estate capital providers. Environmental factors such as the increases in the frequency and intensity of severe-weather-related events are forcing real estate owners and companies to assess property vulnerability and resiliency to proactively manage risk and mitigate the effects of climate change. A real estate company’s corporate social responsibility is just as important because it draws attention to community outreach and talent development. Furthermore, with proper governance in place, management can implement and assess its policies, goals, and reporting efforts for their ESG and sustainability initiatives. Real estate companies now have an increased responsibility to develop its sustainability initiatives; assess its corporate social responsibility; and develop, implement, and govern its ESG policies with integrated and transparent reporting.
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Amy Menist is an Audit Senior in the firms Real Estate Services Group and the Construction Services Group with over 10 years of accounting experience serving both public and private companies.
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