ESG in the Real Estate Industry Requires Collective Approach to Drive Real Change
Grabbing headlines in almost every industry globally, there has been a noticeable shift to focus on sustainability amid the COVID-19 pandemic, to the point that Environmental, Social and Governance (ESG) is becoming a consideration in every transaction and operation. The real estate industry is no exception, as developers face mounting pressure from their investors, regulators, tenants and their own employees to act on ESG.
The acceleration in ESG adoption and sustainability has manifested itself in the exponential rise of Net Zero Carbon commitments, with signatories to the UNFCC’s Race to Zero program more than doubling in 2021 alone. Today over 5,000 companies, 1,000 cities and 441 investors have signed up to achieve net zero carbon emissions by 2050 at the latest. This sits alongside national commitments in Asia made by China, South Korea, Japan and India as announced at COP26.
At this years’ COP26 in my hometown of Glasgow, there have been renewed calls to sharply increase climate action. in the real estate industry this is vital given that buildings account for nearly 40% of global greenhouse gas emissions, 50% of the world’s energy consumption and 40% of raw materials consumed.
But as global leaders and businesses approach these issues in the property sector, it is imperative that we act collectively, be that at government, corporate or individual level and take a holistic approach to drive real change whilst creating sustainable advantage and value.
There have been real tangible moves in capital allocations and expectations from investors. Last year, over USD 700 billion of sustainable and green debt was issued globally, up from USD 250 billion in 2018 according to Bloomberg. Estimates show that investment products tailored for environmental, social and governance factors could grow to more than USD 53 trillion of assets by 2025.
There is a strong financial case underpinning ESG and sustainable investment; from protecting against downside risks, allaying investor pressure, staying ahead of regulatory change to avoid holding stranded or severely discounted assets – the ‘brown discount’. A common challenge is developing an actionable plan to meet these sustainable goals as well as investor and stakeholder expectations.
A review of JLL’s top 50 clients showed that whilst 90% had made public commitments around emissions reductions, only around 19% had a plan of how to achieve these. Taking a position on sustainability and setting targets is arguably the easy part; how you deliver on those targets and ensure you have the right resources and partners is more nuanced but vital.
The good news is that the real estate industry has the tools and understanding to make a difference today. We know how to design, build and operate more efficient and sustainable buildings. We have technology in hand that can be deployed. We also know how to move towards electrification for heating, cooking, transportation and we know how to decarbonize the power supply with renewable energy. Finally, we have the means to offset emissions for the most part, with new technologies set to become commercially viable.
Newer assets under development will have advantages to attract tenants if the landlords are fully aware of the importance of ESG considerations and how these can benefit prospective tenants. The upcoming supply of premium Grade A office buildings in the city, such as The Henderson, show that developer is fully capable of embedding sustainability into every stage of the building life cycle through design, construction and extending into operations.
The same logic applies to existing buildings, where attention must be focused to improve performance and reduce emissions for both landlords and tenants. Central to driving this change will be regulation to raise the base level of performance. Alongside regulation, a system which benchmarks actual environmental performance of buildings across the city, similar to the NABERS rating system in Australia, would be a good place to start.
Looking ahead for where the real estate industry is heading around ESG; the transition to Net Zero Carbon & Climate resilience has already become mainstream and is a central consideration for companies when transacting or operating real estate assets. The sustainability credentials of assets, the funds and developers holding these will be subject to greater scrutiny by regulators, investors and occupiers. Those slow off the mark will find it difficult to protect and create value.
Lastly, partnerships, be that between governments and industry, between employers and employees or between landlord and tenants, will be key. There is no escaping the fact that we need to work together to achieve these ambitious goals and the time is now for us to work as a collective. Influencing others around us through our operations, investments and services to make a real difference.
This article was originally published on the South China Morning Post on 24th November, 2021.