ESG, which stands for environmental, social, and governance, is more than a buzzword these days. It has evolved from a collection of high-minded principles to a more concrete set of expectations. And organizations that fail to meet these expectations put their businesses at risk.
Opinions differ on what ESG efforts should entail, and few people agree on how to measure and evaluate them. But one thing is clear: ESG is becoming a larger factor in real estate investment, sales, and leasing.
Tobias Schultheiß, SIOR, managing partner of Blackbird Real Estate GmbH in Königstein, Germany, has reviewed survey findings from different associations and institutional investors, which confirm that ESG-compliant buildings achieve higher rents and sales prices than those that are not compliant. This means that brokers need to learn as much about ESG as they can.
BEYOND THE BUZZWORD: DEFINITIONS
Many corporations refer to ESG frequently in their communications, but definitions vary. Gartner, the consulting firm, defines ESG as “a collection of corporate performance evaluation criteria that assess the robustness of a company’s governance mechanisms and its ability to effectively manage its environmental and social impacts .”
Conrad Madsen, SIOR, co-founder and partner of Paladin Partners in Dallas, offers a definition that is more specific to real estate. He describes ESG as “a framework used to assess how a commercial real estate portfolio manages risks and opportunities that ever-changing market and non-market conditions create. These changes include fluctuating environmental systems, social systems, and economic systems that impact the landscape buildings are operated within.”
According to Madsen, ESG considerations influence how properties are evaluated, marketed, and managed. Here are some of the ways ESG affects commercial real estate:
ENVIRONMENTAL
The environmental component is perhaps the easiest to evaluate because carbon emissions from properties can be quantified and measured against standards. Properties that perform well can earn certifications like LEED or EnergyStar. Some cities and countries now require owners and operators to collect and report emissions data. Sub-standard performance may incur fines.
It's also easy to find out which methods a building owner employs to improve energy efficiency. Bjarne Bauer, SIOR, managing partner of NAI Sofia Group in Shanghai, provides some examples of these methods: good insulation, effective management of automatic sun blinds, efficient air-conditioning systems, reuse of water, LED lighting, solar panels, and possibly wind turbines around the building.
Bauer notes that the environmental component has become so significant in Europe that companies often accept higher costs and worse user experiences in return for a decreased carbon footprint. Users, for instance, might have to put up with less comfortable temperatures or less illumination.
SOCIAL
The social component is less easy to quantify, but many people agree on its objectives. Madsen focuses on community impact – projects that create jobs or support local businesses, accessibility – properties that accommodate people with disabilities or promote inclusivity, and health and wellbeing – spaces that offer natural light, indoor air quality, and wellness amenities. Few could argue with the social benefits offered by several office buildings and shopping malls in Singapore, which, as Bauer reports, turn their empty parking lots into controlled and safe areas for homeless people to occupy between 10:00 p.m. and 6 a.m., during which time they can access washroom facilities. In short, even if the social component cannot be measured as easily as the environmental component, real estate owners and investors can nonetheless demonstrate a commitment to it.
GOVERNANCE
Governance, like social, is difficult to quantify. To Bauer, it means creating and maintaining “fair and ethical processes that ensure that business is done in the right way.” Madsen notes that governance can refer not only to actions of property owners, but also to those of brokerages. Brokers can demonstrate their own ethical business practices and advocate for responsible property management. Regarding transparency, which he also views as part of governance criteria, Madsen points out that “real estate brokers who provide transparent information about a property’s ESG performance build trust with clients and investors.”
RISK AND REWARDS
Real estate entities that embrace ESG improve both their reputations and their financial prospects. Schultheiß reports that in Europe, core investors have started focusing on buying ESG compliant buildings. “If not compliant, then they don’t buy it!” he stresses, adding that value-add and opportunistic investors are highly interested in good quality assets that don’t comply with ESG but that they ask for significant discounts. Blackbird recently marketed some properties of this type with a discount of 30%. Properties in this category that cannot be sold are termed “stranded assets.” Schultheiß cites a recent analysis by Colliers that warned that in a worst-case scenario, 69% of the total building stock in Germany’s top seven cities could become stranded assets.
Brokers can demonstrate their own ethical business practices and advocate for responsible property management.
HOW TO HELP
To help its seller clients avoid significant markdowns or stranded assets, Blackbird has developed a checklist that summarizes the relevant things an owner can do to make a building ESG compliant. Madsen would approve: He identifies education of clients as one of many steps brokers can take to promote progress in ESG. His other suggestions include:
- Seeking out buildings that demonstrate high levels of ESG
- Incorporating ESG data into marketing materials
- Collaborating with relevant professionals (e.g., sustainability consultants and engineers) to assess and improve a property’s ESG performance
- Emphasizing ESG’s contributions to the long-term value and resilience of a property
- Advocating for adoption of industry-recognized ESG standards such as LEED and WELL certifications
- Facilitating “green leases’ to encourage sustainable practices by landlords and tenants
- Highlighting tax and incentive benefits associated with strong ESG performance
It’s a long list of to-dos, but critical to a broker’s success.
CONCLUSIONS
ESG has plenty of detractors. “It can often be politicized, which hinders progress,” says Madsen. He also identifies common misperceptions – that ESG is a temporary trend, too costly, a marketing gimmick, or relevant only for large properties and corporations. “ESG is a good thing that unfortunately often gets misused and misinterpreted,” says Bauer. Despite the current confusion and misperceptions, brokers can expect ESG to become more clearly defined, pervasive, and regulated in the coming years. According to experts from Deloitte, ESG issues “are at the top of the agenda in the real estate industry and are here to stay.” They should therefore be at the top of the agenda for brokers too.
This article was sponsored by the SIOR Foundation - Promoting and sponsoring initiatives that educate, enhance, and expand the commercial real estate community. The SIOR Foundation is a 501(c)(3) not-forprofit organization. All contributions are tax deductible to the extent of the law.
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