Environmental, social, and governance (ESG) investing has become an increasingly popular investment strategy as investors seek out companies and assets aligned with their values. The real estate industry has begun adopting ESG practices as tenants, buyers, and investors demand more transparency and responsibility. There is a growing focus on sustainable real estate - properties designed, built, and operated to minimize environmental impact and benefit people and communities.
Why ESG Investing in Real Estate
Several factors are driving increased ESG adoption in real estate:
- Climate change is directly impacting real estate through extreme weather events, rising sea levels, droughts, etc. Properties with poor environmental performance face higher risks.
- There are increasing regulations around emissions, energy efficiency, water use etc. which real estate portfolios must comply with.
- Millennials and younger generations have a strong preference for sustainability and ethical business practices. They make up a growing share of tenants and homebuyers.
- Data shows that highly rated ESG properties see higher occupancy rates, rental yields, valuations and sale prices.
Incorporating ESG helps real estate investors manage risks, align with tenant/buyer preferences and secure competitive financial returns.
ESG Strategies for Real Estate Investors
Here are some of the major ways that real estate investors can implement ESG:
1. Energy Efficient Buildings
Seeking out and investing in energy efficient buildings can significantly lower carbon emissions from real estate assets. Strategies include:
- LEED, EnergyStar and other green building certifications
- ENERGY STAR-rated appliances and equipment
- Renewable energy like rooftop solar panels
- Smart thermostats, low-flow water fixtures and LED lighting
- Regular energy audits to identify efficiency opportunities
2. Sustainable Construction and Renovation
Utilizing sustainable construction materials and methods can reduce waste and minimize environmental footprints.
- Eco-friendly building materials like recycled steel, responsibly-sourced wood and natural insulation
- Low-VOC paints and adhesives to maintain indoor air quality
- Managing construction waste through enhanced recycling and diversion from landfills
- Protecting biodiversity by avoiding development in sensitive habitats
3. Water Conservation and Management
As climate change leads to water scarcity in many regions, conservation is crucial.
- Drought-tolerant landscaping requiring less water
- Smart irrigation systems with rain sensors
- Greywater usage and on-site water treatment/reuse
4. Health, Wellness and Community Impact
The “S” in ESG refers to social responsibility. Real estate projects can better communities.
- Providing community greenspaces for recreation
- Shared amenities that bring people together
- Healthy building certifications supporting wellness
- Community involvement, partnerships and volunteer work
- Inclusive housing and developments accessible to a diverse population
5. Strong Governance and Disclosure
Good governance and transparency help demonstrate ESG commitments.
- Public ESG disclosures and reporting
- Board oversight of ESG strategy with executive accountability
- Ethical business policies on issues like tenant/employee treatment and data security
- Getting green building certifications
ESG Certifications for Sustainable Real Estate
Third party ESG and green building certifications provide credible validation of sustainability features and management practices. Some key examples in real estate include:
- LEED: Leadership in Energy and Environmental Design is one of the most widely used international green building standards. Different rating systems apply to different property types.
- ENERGY STAR: This US EPA program certifies commercial buildings that perform in the top 25% for energy efficiency and meet other performance criteria.
- Fitwel: Managed by the Center for Active Design, Fitwel focuses on enhancing buildings to optimize occupant health, productivity and well-being.
- WELL: Comprehensive standard centered on the connection between buildings and human health, wellness and comfort.
- Green Globes: Green Building Initiative green certification based on 1,000 criteria covering energy, water, indoor environment, materials, emissions and other areas.
- GRESB: Benchmark measuring the ESG performance of real assets, allowing investors to assess companies/funds.
The Financial Case for Sustainable Real Estate
Beyond environmental and social responsibility, sustainable real estate also makes a compelling financial case compared to traditional properties:
- Lower operating costs from energy and water efficiency lead to higher NOI
- Increased asset valuations due to above-average performance and lower risk profiles
- Higher rental rates and occupancy supported by strong tenant demand
- Faster sales, larger buyer pools and ability to charge premium pricing
- Better access to capital as investors seek out sustainable assets
A recent GRESB survey found that highly-ranked ESG real estate portfolios delivered 5-year returns averaging 8.7%, compared to 7.3% for bottom-ranked portfolios.
ESG Design, Due Diligence and Operations
For investors interested in sustainable real estate, here are some due diligence aspects to evaluate:
Design & Construction
- Sustainable materials and healthy interior products selection
- Waste management and diversion planning
- Accessibility, transit access and connectivity
- Resilience to climate impacts like flooding, heatwaves etc.
Energy and Water
- Energy and water efficiency specifications and equipment
- On-site renewables such as solar PV feasibility
- Metering and sub-metering to track usage
Indoor Environmental Quality
- Ventilation, filtration and air quality protections
- Thermal comfort analysis (temperature/humidity)
- Acoustic performance and noise reduction strategies
- Natural daylighting utilization
Operations & Maintenance
- Sustainability management plan, roles and responsibilities
- Data collection, monitoring and reporting processes
- Green cleaning policies, pest management etc.
- Climate risk identification and adaptation plans
Getting Started With ESG Real Estate Investing
Here are great first steps for those looking to explore ESG real estate investing:
- Research ESG metrics to include in property evaluations
- Analyze your portfolio to identify sustainability risks and opportunities
- Set ESG policies and goals, seek green certifications
- Enhance due diligence checklists and underwriting processes
- Train your team on sustainable building practices
- Start collecting and analyzing ESG data, seek disclosures from brokers/property managers/developers
- Look into renewable energy and efficiency retrofits to improve existing assets
- Report on progress and achievements to stakeholders
The demand for sustainable real estate will only increase. Adopting ESG strategies can future-proof portfolios while aligning investments with investor values and making positive sustainability impacts.
FAQs About ESG Investing in Real Estate
What are some top ESG strategies for commercial real estate?
Major ESG approaches in commercial real estate include obtaining green building certifications like LEED, installing energy efficient HVAC and lighting, managing water use through low-flow plumbing fixtures, setting sustainability policies for property operations, using eco-friendly cleaning supplies, and receiving third party verification of ESG metrics.
Do sustainable real estate assets have higher valuations?
Yes, research indicates that highly rated ESG/green certified commercial properties trade at premiums averaging 5-10%, compared to conventional buildings. Sustainability helps lower operating expenses, drives higher NOI, reduces risk, and elevates demand - all supporting increased valuations.
How can residential developers focus on ESG?
Residential developers can concentrate on sustainability features like solar installations, EV charging infrastructure, net zero energy designs, water recycling systems, CO2 monitoring, renewable construction materials, community greenspaces, smart home technology integration, and shared mobility access.
What are some leading global green building certification programs?
The most widely adopted green building certifications globally are LEED, Energy Star, Fitwel, WELL, Green Globes, and GRESB. These programs use rating criteria and third-party verification to evaluate and benchmark the ESG, sustainability, health, and wellness attributes of real estate projects and portfolios.
Where can investors find data on real estate ESG metrics?
Useful resources for real estate ESG data include sustainability benchmark surveys by GRESB and UNPRI, US EPA Energy Star portfolio manager, green building certification analyses, ESG reporting frameworks like GRI and SASB, CDP climate change and water security disclosures, and individual company sustainability reports.
