Environmental, social and governance (ESG) factors have become a common framework for assessing a commercial real estate (CRE) portfolio. Today, investors increasingly consider these elements to help identify risks and growth opportunities. According to CBRE’s 2022 U.S. Investor Intentions Survey, 70% of survey respondents have adopted ESG criteria, and another 10% plan to do so over the next three to five years. This represents a significant jump from 56% of investor respondents who said the same in 2021.
What’s behind the increase? While the concept has been around since the 1960s, ESG factors have rapidly gained momentum in CRE investing in recent years due to growing interest in sustainability among investors, property owners, landlords and tenants. The pandemic, natural disasters and social justice issues have propelled ESG into the mainstream. Looking ahead, ESG factors are expected to continue to drive value for real estate investors.
Defining ESG in the Commercial Real Estate Industry
ESG represents three key areas of sustainability — environmental, social and governance. In a rapidly changing world, applying ESG criteria helps investors create sustainable long-term value.
- Environmental factors relate to a company’s environmental impact. Examples include a property’s carbon footprint, water usage and preparedness for climate-related risks.
- Social considerations focus on how a company manages relationships and creates value for stakeholders. Examples include the revitalization of urban areas, community infrastructure support and reducing income inequality through capital allocation and stewardship.
- Governance criteria reflect a company’s philosophies and management practices. Examples include effective board composition, Diversity, Equity and Inclusion (DEI) policies, transparency practices and business ethics.
The Benefits of ESG Strategies
Long term, ESG strategies are helping the commercial real estate industry create positive changes in carbon reduction, energy consumption and overall health and wellness. In the nearer term, sustainable practices can help reduce operating costs, attract and retain tenants, and increase property values.
Risk reduction is another important benefit of ESG strategies in commercial real estate. Enacting sustainability-focused initiatives can reduce physical, regulatory and economic risks.
- Reducing a property’s physical risks related to climate change can lower insurance premiums and operating costs while increasing property value. Investors consider a property’s resilience or ability to withstand environmental stressors and extreme weather events. In addition to resilience, investors look at a property’s impact on climate.
- Regulatory risk is a factor in three primary areas— reporting, ordinance compliance and incentives. As investors seek ESG information, regulators are setting reporting requirements to improve consistency and benchmarking accuracy. At the same time, cities are enacting building requirements, such as net-zero building ordinances that require the reduction of building emissions on a defined schedule.
- Sustainability credentials help to reduce economic risks for investors. For example, green building certifications, like LEED (Leadership in Energy and Environmental Design) or Energy Star, produce higher occupancy rates, earn higher rents and increase the probability of lease renewal.
The Appeal of ESG-Related Tax incentives
ESG practices also offer opportunities to reduce tax liabilities through rebates, tax credits and discounts. The Inflation Reduction Act, enacted in August 2022, expanded tax incentives to promote energy-efficient improvements. Today, available renewable energy tax credits include:
- The Renewable Electricity Production Tax Credit (PTC) provides a tax credit of up to 2.6 cents for each kilowatt hour (kWh) of electricity generated by specific types of wind, hydropower and clean hydrogen renewable energy projects.
- The Commercial Buildings Energy-Efficiency Tax Deduction offers up to $5 per square foot in tax deductions for builders who create energy-efficient commercial buildings.
- The Investment Tax Credit (ITC) provides a 30% tax credit for installing designated renewable energy generation equipment, including solar, geothermal, wind and other renewable energy technologies.
Beyond environmental incentives, tax programs tied to social and governance efforts are also available. For example, the longstanding federal Historic Tax Credit (HTC) is designed to support the revitalization of communities. The HTC equals 20% of eligible building rehabilitation expenditures.
As ESG investment considerations continue to develop, 85% of investors surveyed in CBRE’s 2022 survey said protecting the environment is the primary goal of their ESG criteria, and 56% cited the need to protect the value of real estate assets. The dedicated commercial real estate team at CBIZ can help you achieve your goals and optimize ESG opportunities. Explore more resources here and connect with a member of our team today.
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