THE IMPORTANCE OF ESG IN REAL ESTATE DEVELOPMENT
Environmental, social, and governance (ESG) factors are increasingly important in real estate development as they address climate change and social injustice. As a result, ESG is now considered at every stage of a property’s lifecycle, including due diligence, acquisitions, leasing, design, construction and asset management. AYR identifies several ESG considerations for real estate development, reviewing current trends, innovations, and regulatory requirements under these categories.
ENVIRONMENTAL
Real Estate developers are now devoting more thought to ensuring how their projects can address the climate change problem.
Embodied carbon emissions
Embodied emissions, which come from the production of building materials, contribute another 11% during the construction process. Developers are pressured to reduce their carbon footprint and invest in sustainability, as occupiers and investors are increasingly interested in environmentally friendly properties. This trend is expected to preserve asset value and increase the value of sustainable properties.
Green buildings are becoming premium assets.
Green buildings are often newer and considered premium assets. Consequently, buildings with strong environmental performance tend to command higher rents than non-green properties. While it may take time to determine the exact sustainability premium for such buildings, the potential for a “brown discount” (lower value) for properties with weaker environmental performance indicates the importance of investing in sustainability.
Green building materials
The building and construction industries contribute approximately 40% of annual global carbon emissions, with concrete and steel manufacturing accounting for about 5%. Timber is a more environmentally friendly alternative due to carbon sequestration. Timber buildings can sequester 2,000 to 4,000 metric tons of carbon dioxide during construction, compared to the 1,000 to 2,000 metric tons of carbon dioxide emissions from an average steel and concrete building.
Regulatory requirements will tighten.
There has been a significant increase in ESG regulations affecting property owners recently, as governments and industry organisations mandate green reporting standards. For example, in Australia, the NABERS building rating system, now required for buildings larger than 1,000 sq. m., has helped participating buildings reduce their energy consumption by an average of 35 percent and their carbon emissions by around 50 per cent. Some buildings have reduced energy consumption by as much as 80 per cent.
Effective risk management can improve resilience.
In the context of ESG and real estate development, resilience refers to the ability of buildings to continue operating during disruptive events, such as pandemics and extreme weather events. Many of the built environment’s significant risks are related to climate change, with severe weather often causing substantial property damage. For example, in recent months, wildfires and floods have caused deaths and widespread damage in various parts of the world. As climate change risks increase, so do costs. For example, global property insurance premiums have increased by double-digits in the past seven quarters as real estate portfolios suffer physical damage from natural disasters.
SOCIAL
Real estate has a significant social impact on the communities as it is an integral part of neighbourhoods and communities. A diverse range of people use it, influencing the value and character of the surrounding properties. It is also essential to the economic health of a region and the productivity of the people who use it, making it unique among asset classes.
Affordable housing creates “impact investing” opportunities.
The affordable housing sector in Australia offers attractive opportunities for impact investing, generating significant social benefits while providing strong financial returns. There is a high demand for affordable housing due to worsening housing delivery. Many tenants pay more than 30% of their income on rent. The main target demographic for affordable housing is households earning less than 60 percent of the median income, but “key worker housing” initiatives being promoted by policymakers could also expand the availability of affordable housing to middle-class families who make up around 60 percent of the median income and are struggling with rising home prices.
Health & wellness is influencing building design.
Developers and architects are incorporating health and wellness into a building design by considering factors such as proper ventilation and air filtration to improve indoor air quality, access to natural light, good acoustics, thermal comfort, access to nature, fitness and recreation facilities, and the use of low-toxicity and low-VOC materials and finishes. These considerations are essential for improving respiratory health, mood, productivity, and overall well-being, as well as for encouraging physical activity and reducing the risk of adverse health effects.
GOVERNANCE
In the real estate industry, governance involves issues such as executive compensation, management diversity, policies and practices to prevent corruption, and the payment of taxes and political donations. It also includes a company’s values, ethics, and commitment to “doing the right thing.” With governments and shareholders demanding greater transparency and reporting on these issues, real estate developers must ensure that their governance practices go beyond minimum compliance with relevant regulations.
Corporate social responsibility is essential to good governance.
Corporate social responsibility (CSR) increasingly influences corporate governance practices. It includes creating a corporate culture with shared values that help a developer’s employees and the communities and promoting equity, diversity, and inclusion. The real estate development industry governance also includes enhancing transparency and decision-making, particularly regarding progress towards ESG goals. Other policies under this governance include vendor selection and treatment and tenant engagement and relations. By establishing a robust ethical and social platform, developers can improve their operational resilience and be better able to withstand crises such as economic volatility, climate and health risks, and disruptive competition.
Benchmarking and reporting will become essential.
Developers use benchmarking tools such as the Global Real Estate Sustainability Benchmark (GRESB) to monitor and evaluate asset-level ESG performance. GRESB collects and compares data on the ESG performance of real estate and infrastructure entities and assigns a score and rating to measure and rank their performance among their peers. Participants also receive an analysis of their performance, highlighting strengths and weaknesses in leadership, policies, risk management, health and safety, carbon emissions, building certifications, and stakeholder engagement.
Technology is vital to achieving ESG goals.
Technology plays a crucial role in helping developers collect and report on ESG data and create long-lasting change in their practices and developments. It includes data management platforms for storing and processing ESG data, monitoring platforms to streamline ESG review and delivery processes, and Prop Tech-based platforms to enhance the tenant’s experience. In addition, Enablement technologies that monitor and improve the energy performance of buildings are also being more widely adopted. These technologies can be connected to a building’s management system to retrieve real-time energy data, analyse it, and determine the best strategies for improving energy efficiency and reducing costs.
Conclusion
ESG factors are important considerations in real estate development. They address critical issues like climate change, social justice, and ethical business practices. ESG is now being considered at every stage of the development process, including due diligence, site acquisition, design, and construction. As occupiers and investors become more interested in environmentally friendly properties, this trend is expected to preserve asset value and increase the value of sustainable properties. Investing in ESG can also help to reduce a developer’s risk profile and improve its reputation.
As an ethically responsible company, AYR is part of the ESG Movement. We focus on delivering ESG infrastructure, from affordable housing and green energy to green data centres. Our goal is to build a better future for all communities. If you share the same vision and want to invest or be part of the movement, visit AYR International and be part of the ESG Movement or follow us on LinkedIn.
Author: Ron Forlee
