The ESG Framework and its Impact on Real Estate Development and Investment
It pays to go green!
Sustainability is becoming ever more important in the development of and investment in commercial real estate (CRE) due to several factors:
- Increased attention to Environment, Social and Governance (ESG) issues at the corporate level.
- Increased interest from the real estate investment community in ESG aspects of development.
- Demographic impact of millennials placing a greater importance on environmental and social issues.
Corporate Interest in Sustainability via the ESG framework
The ESG framework supports increased value creation potential in green building practices as a fundamental shift in business practices for the industry. ESG has emerged as the new corporate term for sustainability; the acronym itself stands for measurable elements in the sustainability framework: environmental, social and governance issues.
- Environmental factors involve the natural environment. Examples include energy use, water use, climate change policy and action, manufacturing practices, and material choices, among others. The development community continues to innovate in the environmental factors of ESG, including energy procurement contracts to enable investments in renewable power sources, net-positive energy projects, and the upcoming EC3 tool aimed at reducing embodied carbon in building products.
- Social factors involve and impact people. Examples include attraction and retention of talent, workplace productivity, health and wellness, volunteer programs, and impacts to the communities that a company interacts with. According to a report published in 2016 by JLL, customers spend $3 per square foot (SF) on utilities, $30/SF on rent and $300/SF on payroll. There is enormous opportunity to leverage corporate/investor interest in social aspects of ESG with building standards such as the WELL Building Standard or the "Petals" defined by the International Living Futures Institute (Health & Happiness, Equity and Beauty).
- Governance factors involve how an organization sets policy and governance standards. Examples include diversity, equity, and inclusion, greater transparency along all levels of the organization, and others. Additionally, a clear understanding of roles and ownership of any issues that arise is critical for good governance.
ESG is of increasing importance to corporations due to demand from both customers and employees who are concerned with the impact their company has on the world around it.
Interest from the Investment Community via the ESG framework
- The Forum for Sustainable and Responsible Investments (US SIF) reports that 1 in 4 dollars under professional management in the U.S.—$12.0 trillion or more—was invested with ESG in its approach.
- According to ULI’s Emerging Trends in Real Estate Report 2019, “A sophisticated approach to ESG practices can be critical for efforts to attract and retain capital resources, especially from institutional and international investors as well as in the world of public REITs.” In the same report, a survey of 229 of the world’s leading impact investing organizations shows that 91% of the respondents think “intentionally pursuing impact through their investments” is very important.
- From the commercial real estate operations perspective, Brett Phillips of Unico Sustainability predicts that, “It’s essential for sustainability to be seen as a profit center rather than a cost center. Unico has lived by this principle, delivering nothing short of high-quality LEED Gold and LEED Platinum buildings since 2008 without sacrificing return.”
Demographic Shift
A greater focus on sustainability will continue to be of greater importance as the impact of climate change and resource depletion creates economic impacts that are only more obvious. This will be coupled with the demographic shift of millennials aging into positions of company leadership, of wealth-management responsibility both personally and professionally, and individually making investment decisions. Consider these facts:
- By the year 2025, millennials will comprise 75% of the workforce.
- 79% of millennial employees are loyal to companies that care about their effect on society.
- 30 trillion dollars of wealth is estimated to shift to younger generations in the next 30 years.
- 95% of millennials signaled an interest in sustainable investment with many citing their belief that their dollars have the power to alleviate poverty and slow climate change (sources: Morgan Stanley; NPR)
Our hope with this blog post is to connect the development community with the conversations occurring around sustainability at the corporate and investor levels. As awareness grows, it will become easier to convince investors and building occupants that it makes financial sense to invest in building technologies and practices that protect us from the negative impacts of climate change and resource depletion while creating spaces, buildings and cites where people can thrive.
This article was written by NAIOP Washington State and Sustainability Committees member Lanzi Li, Project Manager, Heartland LLC, and Angela Tomlinson, Market Development Director, Catalyst Workplace Activation.