ESG REPORT | Part III: ESG Considerations in Real Estate

In the movement toward responsible investing, real estate investors and asset managers have mostly welcomed environmental, social, and governance considerations into their strategies. However, there are still more improvements to be made in order to ensure that ESG frameworks are being carried out in full within the real estate investment industry. Although there have been dramatic improvements in the last five years, many real estate investment funds and REITs could still better their ESG practices and consequently maximize their financial returns.

There exists a window of opportunity for REIT investors to accelerate their businesses through the implementation of ESG practices. Firms are quickly realizing that these frameworks can be utilized to ensure significant competitive advantages over other companies within their respective industries. In 2013, researchers showed that the sale price per-square-meter increases with a property’s Energy Performance Certificate (EPC) rating. Two years later, novel research demonstrated the financial materiality of ESG integration pertaining specifically to REITs: for every 1% increase in the Global Real Estate Sustainability Benchmark (GRESB) score, ROA increases by 1.3%, and ROE increases by 3.4%.

These numbers demonstrate the types of financial rewards that real estate asset managers can expect from ESG integration. The figures also offer a reflection of the tremendous environmental impact that the real estate industry has. Over 33% of global greenhouse gas emissions and global energy consumption can be attributed to real estate, making ESG-conscious infrastructure more crucial than ever. In the last few years, asset managers, investors, and real estate companies have begun to embrace more ESG-oriented cultures. However, there is still more to be done to ensure companies are operating in ways that allow them to maintain ESG standards while maximizing profits.

It is evident that not all real estate companies have been equally receptive to aligning themselves with ESG best practices. REITs in North America have been much slower to adopt ESG considerations than similar funds in Europe.

Although asset managers, investors, and the general public seem to be receptive to incorporating lasting ESG measures into the real estate industry, there is still significant room for growth. Real estate firms who are willing to achieve high standards of ESG in their day-to-day business practices could benefit substantially from not only a better reputation in the eyes of LPs, but also from more responsible and sustainable investments that yield positive impact on long-term profit and growth.

This concludes the second report in a four-part series on the significance of ESG in investment management. To view our work on ESG materials for clients, click here.

If you’re interested in communications and branding topics in private equity and real estate investing, subscribe to DG Journal.