Environmental, Social and Corporate Governance policies are changing our real estate world.
Did you know that buildings generate nearly 40% of global greenhouse gas emissions?* Such data is driving real estate investors to adopt ESG, or Environmental and Social Corporate Governance. Sustainable building attributes affect a property's value, the health and wellbeing of tenants, the ability for employers to attract talent, and the climate. The wide-ranging components of ESG strategy can address the design and operation of properties as well as transparency about a company's diversity and inclusion.
De-carbonization Challenge
One of the hottest (no pun intended) climate topics is carbon neutrality. The Living Future Institute's standard for net zero carbon reads, "one hundred percent of the embodied carbon emission impacts associated with the construction and materials of the project must be disclosed and offset." Building materials that have lower embodied carbon -- the energy required to produce and transport the material -- translate to environmental impact. One example is mass timber, harvested from quick-growth forests and whose relative light weight allows rail transportation to and shallower pile driving on the construction site. Architecture2030 is a non-profit, nonpartisan and independent organization whose 2030 Challenge calls for carbon-neutral buildings by 2030. In response, the American Institute of Architects and hundreds of real estate companies have pledged a commitment to carbon neutrality. Although corporate timeframes for net zero carbon status differ (often 2030, 2040 or 2050) a horizon seems in sight.
Quiet Savings
ESG efforts are perhaps most noticeable in the shift from short-term decision making to long-term results. For instance, more efficient systems (such as a shared energy loop or recycled water) lower building operating expenses, for which tenants generally pay a pro rata share. These environmentally-friendly systems save money over the life of a building, for energy expenses not incurred. If the economic and functional life of a building measures twenty years or longer, savings accrue over time, not at the property's ribbon cutting. That's where certifications -- and yes, some marketing and communication -- can help.
Certifications: An Alphabet Soup
The real estate industry is awash in an alphabet soup of green certifications and labels: LEED, WELL, TRUE, 'Net Zero', to name a few. The dizzying array of programs reflects both a relatively nascent sector as well as industry interest. As Nathalie Palladitcheff, President and CEO of Ivanhoe Cambridge notes, "as soon as you have a word for something, that means it's happening." The task though, is to assess and analyze green efforts to purposeful ends. Corporate 'report cards' that quantify sustainable efforts top the list for many property companies that seek to avoid 'greenwashing' - that is, superficial or ineffective sustainable efforts. Such a report card might take the form of an ESG criteria sheet for investors with a low/medium/high rating on healthy and green properties.
"Greenwashing," "Green Financing," "Green-ium"
As soon as you have a word for something, that means it's happening
- Nathalie Palladitcheff, President & CEO, Ivanhoe Cambridge
Leasing and Tenant Retention
ESG allows a competitive market edge with the ability to attract credit-worthy tenants who care about social and environmental issues. For decision makers attuned to such challenges, corporate governance can allow users to lease a built environment that is commensurate with its own values. And, the long term operating efficiencies discussed above encourage such tenants to renew leases, thereby minimizing loss to lease, marketing and legal expenses. For landlords, a market- competitive building protects against vacancy. As guaranteed rental income underpins a property's value, such leasing advantages directly affect the bottom line.
ESG Adoption
In a recent presentation given by U.C. Berkeley's Fisher Center for Real Estate and Urban Economics, real estate executives note an opportunity to write an ESG story, in advance of regulation and with Europe and Canada as potential models. For instance, consider Europe's longstanding use of rain screens and living roofs. Episodic American legislative examples, however, are occurring. In California, new and significantly renovated commercial buildings are required to be carbon neutral by 2030. New York City calculates carbon intensity on a per square foot basis, with fines for properties that exceed designated limits.
While the magic equilibrium of risk versus reward is a challenge in capital-intensive real estate, ESG policies seem to have altruistic, risk-mitigant and profitable attributes. Liquidity -- a property's sales price -- will provide proof as buildings align with the market and its desires. The new norm of what a market expects from a building, including its sustainable features, protects against obsolescence. Thus, ESG may not be a choice between risk and opportunity, but rather, that what is a sustainable and healthy built environment is also profitable. Not to mention blue skies, clear water and happier tenants.
Sources:
American Institute of Architects
Fisher Center for Real Estate and Urban Economics
Gensler