There are strong arguments to support incorporating the ESG criteria into decisions to invest in and manage properties. In a survey prepared at the request of the United Nations’ Environment Program, “Global ESG Real Estate Investment Survey”, in the early 2019 the majority of investment funds gave the following reasons to support the incorporation of the ESG policy into the investment process:
Reducing business risk
Accounting for ESG-related components such as climate risk, energy or water consumption and management of municipal waste and greenhouse gas emissions in the process of building management can help reduce the risk of its obsolescence and, in consequence, will help drive down operating expenses. That is a clear proof showing the correlation between the ESG and the fund’s financial performance. What is more, the analyses show that obtaining the so-called “green” certificates for buildings (as part of the implemented ESG policy) helps increase a net operating income and improve an overall valuation of such buildings compared to non-certified buildings.
The property sector is also exposed to “physical” effects of climate change. Effects of devastation, if any, will manifest themselves in the form of, e.g. higher investment expenditure and operating expenses which will adversely affect liquidity and value of the buildings. Extreme weather conditions may become more frequent which, in turn, may lead to higher insurance premiums and capital costs to maintain the buildings’ proper standard.
Legal regulations have become more and more rigorous upon the adoption of the Paris Agreement. Signatory countries will be implementing strategies for the reduction of greenhouse gas emission in the years to come and the property sector is one of the economy’s key areas towards which the measures are to be orientated. The implementation of the ESG policy by owners of buildings will help plan measures related to adjusting to low emission requirements and avoid the risk of bearing costs of insufficient transformation.
Growing demand among tenants for space in “green buildings”
Tenants have been more and more frequently choosing high quality buildings which are LEED or BREEAM certified which evidence that a given building is environmentally friendly, including, as regards energy use, emission of pollution, water use, and offers solutions that ensure health security or well-being. If applied, those solutions ensure optimal value of the property for investors as they are preferred by tenants.
The demand for such buildings among tenants frequently results from their ESG strategies and is also a response to requirements of current and potential staff to whom ethical business and responsibility towards the environment play a crucial role when choosing an employer.
Increasing demand among investors for information on sustainable development
To respond to the investors’ expectations, fund managers rely on various tools allowing them to present the performance and assessment of the degree to which ESG has been implemented at the level of assets or portfolio. Investors are aware how ESG affects operational activity, hence, it can be expected that in the future they will focus not only on the kind of data to be disclosed but also on the quality, range, importance and comparability of the data.
What is more, investors look for such information to be able to rely on it in the process of taking investment decisions regarding funds invested on a current basis, and above all in regard of decisions
about their future activity.
Global Sustainable Investment Alliance’s data show that approx. ¼ of funds managing approx. USD 31 trillion worldwide has already been applying different forms of the ESG strategy measurements. Although property assets represent just a few percent of that amount, in absolute figures such volume is impressive and it is only expected to grow.
Expecting an upward trend is justified as in the world (e.g. in USA or in Japan) funds have already been established whose strategy involves investing only in sustainable products that are GRESB- benchmarked in terms of the ESG policy.
More information regarding the ESG you can find in our “Future of cities – sustainable investing” report.