You may have heard the term ESG, but what does it mean? ESG stands for environmental, social and governance. ESG is a set of non-financial factors that investors use as part of their analysis to screen potential investments. Socially conscious investors want to make sure that companies are minimizing their negative environmental impact, considerate of people and relationships, and are transparent and accountable to investors.
ESG AND REAL ESTATE
The application of ESG factors has become increasingly relevant in the real estate landscape. Investors are becoming more aware of these principles and placing a higher value on them. Both investors and tenants want real estate that is sustainable and has a positive impact on the community. This newsletter will provide examples of what investors are looking for in the current real estate market as it relates to ESG.
ENVIRONMENTAL
In general, the real estate sector is a large consumer of energy. Choosing green alternatives will not only make the construction process more environmentally friendly, but also reduce energy usage during the life of the building. Developers should consider using recycled and reusable materials, an effective water management system and the use of solar panels, when possible.
For the past few decades, many buildings aimed to be LEED (Leadership in Energy and Environment Designed) certified, which is a green building certification program. Although LEED will remain an important way to measure a building's potential energy usage, carbon emissions are becoming a new focus. A more recent initiative is the World Green Building Council's Net Zero Carbon Buildings Commitment, which calls for all buildings to have net-zero carbon emissions by 2050. Building and construction accounts for a large percentage of global carbon emissions. Developers should consider green construction materials that will reduce carbon emissions during construction.
Implementing ESG standards into your buildings can result in benefits. According to a U.S. Green Building Council study, the initial cost of a green building is only 2-3% higher than a non-green building, but consumes 25-35% less energy. Additionally, operation and maintenance costs are 14% lower than conventional buildings. There have also been analyses done which indicate that the average rent in a green building is almost one-third higher than rent in a non-green building.
SOCIAL
Social initiatives can help build trust amongst employees and tenants. People want to feel that their health, well-being and safety is a priority when they are inside of a building. Many landlords have implemented the WELL Building Standard which measures, certifies and monitors the features that impact occupant health. These features include air, water, nourishment, light, fitness, comfort and mind. By making sure that a building is providing high air quality, clean water, natural light and taking COVID-19 precautions, tenants will feel more comfortable and have peace of mind. The WELL v2" Building Standard, which is currently in a pilot stage, also considers other factors such as sound, materials and community.
The new community factor places value on diversity, equity and inclusion. Designing spaces in a way that enables all genders, races, ethnicities, religions and economic statuses to have equal access to spaces and participate in the community is important. Providing affordable housing generates social benefits and can also provide financial returns since these units are more likely to stay occupied during an economic downturn. The IRS also provides a low-income housing tax credit for the acquisition, construction and rehabilitation of affordable rental housing. Placing affordable housing in mixed-use buildings can also allow better access to grocery stores, schools and hospitals for the tenants.
GOVERNANCE
Investors are expecting more and more transparency. They want evidence that ESG metrics are being monitored. Data such as indoor air quality, water usage, waste management and power consumption are factors that will influence investors. As a property is being developed, investors will want regular communication so they can be confident that there is effective management of the property. Technology is key in providing ESG data, so make sure that you are up-to-speed with the platforms that effectively monitor and streamline this information.
TAKEAWAYS FOR PURCHASING YOUR NEXT DEVELOPMENT
As you look to develop your next property, make sure to monitor the ESG performance. As ESG regulations and benchmarking are becoming more robust, investors will expect to be provided information to ensure that the property is sustainable throughout its life cycle. Effective management and implementation of ESG criteria will not only lead to a larger pool of investors, but also will ensure that you are making a positive environmental and social impact.
Related Read: DOL Alert: Proposed Regulation on Environmental, Social and Governance Investing and Shareholder Rights
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
