How does ESG impact commercial real estate?
Commercial real estate firms with sophisticated ESG strategies can increase asset value, lower operating costs, and unlock sustainable financing opportunities.
Figure 6.
The policy primarily affects heavy emitting industries such as transportation, transportation infrastructure and automobiles.
ESG-Rating
One example is ECORE scoring, which was created in 2020 by the industry initiative ECORE (ESG – Circle of Real Estate) specifically for the real estate market. This is a scoring system that is divided into three areas: governance, consumption and emissions, and asset check.
ESG describes the three areas that characterize a sustainable, responsible, and ethical investment: environmental, social and governnance.
New McKinsey research finds that companies that courageously pursue stronger growth and profitability while improving ESG performance deliver superior shareholder returns.
“ESG investments are often opposed by conservatives who feel that ESG investments favor one political ideology and pressures companies to adopt 'woke' policies they don't support,” says Bruce.
ESG scandals are often associated with reputation damages, leading to slumps in stock prices (Gao et al., 2022; Nirino et al., 2021; Walsh et al., 2009). For example, in 2014, the market value of Volkswagen lost approximately 15 billion euros due to its emission manipulation scandal.
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.
| Rank | Company | ESG Score |
|---|---|---|
| 1 | ASML Holdings N.V. | 73.13 |
| 2 | Check Point Software Technologies | 72.64 |
| 3 | Hermes International SCA | 71.71 |
| 4 | Linde | 71.26 |
ESG definition and components
The criteria for evaluation at an asset level include factors such as the energy consumption in the building, the water use metrics, waste generation, GHG emissions, climate risk assessments and third party ratings (e.g. LEED, Energy Star, etc.).
What is the social aspect of ESG for real estate?
In particular, the social aspect of ESG, which includes tenant experience, is crucial for ensuring long-term sustainability and profitability of a property. Tenant experience is an important component of the social aspect of ESG because it impacts tenant satisfaction and retention.
What is ESG explained in simple terms? ESG stands for Environmental, Social, and Governance. It is a framework used to evaluate a company's sustainability and ethical impact.
ESG stands for environmental, social and governance. These are called pillars in ESG frameworks and represent the 3 main topic areas that companies are expected to report in. The goal of ESG is to capture all the non-financial risks and opportunities inherent to a company's day to day activities.
Cost reductions ESG can also reduce costs substantially. Among other advantages, executing ESG effectively can help combat rising operating expenses (such as raw-material costs and the true cost of water or carbon), which McKinsey research has found can affect operating profits by as much as 60 percent.
The analysis revealed that 58% of the papers found positive relationship between ESG and financial performance, 8% negative relationship, 13% no relationship, and 21% mixed results.
First, an ESG focus can help management reduce capital costs and improve the firm's valuation. That's because as more investors look to put money into companies with stronger ESG performance, larger pools of capital will be available to those companies.
Additionally, some critics have raised concerns about the complexity and reliability of ESG metrics. But much of the backlash is driven by the perception that ESG criteria are biased against certain industries like oil and gas. Critics argue fund managers are prioritizing political goals over generating returns.
Larry Fink is caught in the middle of the heated climate change debate. The CEO of BlackRock, the world's largest asset manager, has become a lightning rod for criticism from conservatives due to his push for environmental, social, and corporate governance (ESG) investing over the past few years.
The emphasis placed on the need for sustainability has caused a commensurate backlash – an anti-ESG movement that (wrongly) believes a focus on better business must automatically result in worse profits. What is the World Economic Forum doing to help companies reduce carbon emissions?
| Pros | Cons |
|---|---|
| Can help investors diversify their portfolio | ESG funds may carry higher than average expense ratios |
| May reduce portfolio risk | ESG investing is still a fairly new concept and there isn't a ton of reporting on performance |
Do companies care about ESG?
A strong ESG reputation can help differentiate a company from its peers and enhance its brand value, which can lead to increased customer loyalty, and value of a company's brands.
By considering ESG factors, investors get a more holistic view of the companies they back, which advocates say can help mitigate risk while identifying opportunities.
ESG investing can help investors mitigate risks
Focusing on ESG issues forces companies to think about the long-term sustainability of their enterprise rather than short-term profits. Most investors also think in the long term rather than the short term.
ESG risk management supports sustainable, long-term growth by proactively evaluating potential issues; early knowledge of potential risk provides more time to adapt and develop cost-mitigating strategies.
It is more and more becoming the standard in the investment industry, especially in Europe, where most of the sustainable fund's assets are concentrated. The most common approach to investing sustainably is through ESG integration - by explicitly and systematically factoring ESG issues into the investment decision.
