With worries about a possible looming global recession and heightened pressure for returns, real estate developers and landlords may overlook ESG in favour of more conventional metrics such as occupancy and rental income. Yet, ESG does positively correlate with higher-valued real estate assets.
For instance, a building with energy efficiency and a strong environmental record may have more appeal to tenants and bring higher rental returns, while a building with poor ESG performance may exhibit increased expenses and decreased demand.
In fact, a recent study in London showed the highest-value buildings, with the highest rental incomes are more closely correlated with more advanced and expensive ESG building techniques and technology, for example, the inclusion of photovoltaic cells. Put another way, with occupiers and their staff focused more heavily on ESG factors in their own businesses and lives, they want their workspaces to match their personal values in those areas.
A business that prioritises carbon reduction will not want to occupy a carbon-inefficient building, for example.
To help think about how to best implement ESG, real estate market participants look to ESG frameworks such as GRI, SASB and CDP to provide a structured evaluation and prioritisation of ESG factors.
However, the best method of evaluating and prioritising ESG is still a topic of debate in the industry.
Although numerous established ESG frameworks exist, some managers and owners prefer to establish their own custom frameworks, leading to the question: do ESG frameworks really work effectively?
On the one hand, established ESG frameworks give a structured evaluation and prioritisation of ESG factors, ensuring their integration in the construction and investment processes. On the other hand, custom frameworks can cater to the specific investment goals and risk tolerance of each firm, providing a more focused approach to ESG risks and opportunities.
Both established and custom ESG frameworks can be effective. For instance, established frameworks may suit firms just starting to include ESG in their investment process, while custom frameworks may be more appropriate for experienced market participants with a deep comprehension of ESG risks and opportunities.
Apart from ESG frameworks, real estate market participants are investigating fresh approaches to decarbonisation, such as investing in renewable energy and low-carbon technology. This shift towards green infrastructure stems from a heightened awareness of climate change's impact and the potential for financial gains from this activity.
As the real estate sector evolves, it is imperative that participants stay ahead of the curve and utilise new technology and innovative approaches to ESG and decarbonisation.
The recent tensions between Russia and Ukraine have also triggered a new surge of interest in decarbonisation and green infrastructure, with governments and investors aiming to decrease their exposure to carbon-intensive and fossil fuel assets turning to renewables instead.
This presents a new opportunity to generate value through green infrastructure development and ownership. From wind farms to solar plants, real estate has significant potential in this area, offering appealing returns and shielding against rising energy costs while also supporting the shift towards a more sustainable energy mix.
In this new landscape, the significance of innovators in the real estate industry cannot be underestimated. Companies that are at the forefront of green infrastructure development and deployment are well-positioned to reap substantial value and expand their businesses. This is particularly true for those companies that can strike a balance between profit and sustainability, delivering returns to investors while also contributing to reducing carbon emissions globally.
For real estate managers and owners, the move towards green infrastructure and decarbonisation provides a rare chance to create value, advance sustainable development, and fulfil the changing needs of their stakeholders.
However, making the switch to green infrastructure is not without its challenges. As companies seek to capitalise on the growing demand for sustainable investments and amenities, this does give rise to another problem: greenwashing, which has become a major concern in the real estate industry.
The raid on Deutsche Bank and its subsidiary, DWS, by German police and financial regulators in Frankfurt in May 2022 as part of an investigation into allegations of greenwashing shows how seriously the problem is being taken.
The raid follows a similar probe by the US Securities and Exchange Commission (SEC) that was triggered by former DWS executive Desiree Fixler's accusations of misleading statements in the 2020 annual report.
The offices of Deutsche Bank were also raided due to its close relationship with DWS. The Frankfurt public prosecutor's office said there was sufficient evidence to suggest ESG factors were not considered in many investments, amounting to potential "prospectus fraud."
Aside from approaches to greenwashing and ensuring companies are not overstating the value of their ESG solutions, there is also the financial outlay. The upfront costs of investing in renewable projects can be high, especially the process of retrofitting existing buildings. In addition, regulations and compliance rules regarding green infrastructure can be challenging to follow, especially as these may differ across jurisdictions.
Despite these challenges, by moving towards green infrastructure, companies can both reap the financial benefits of ESG investments whilst helping to “green the world,” moving towards a cleaner and more sustainable built environment. Ultimately, ESG is not just good for the environment, but also good for business.
