Incorporate ESG Into Your Commercial Real Estate Strategy
Shifting market and non-market conditions create a variety of risks and opportunities in commercial real estate. Property owners and landlords have three key areas of sustainability: environmental, social, and governance (ESG). All have strategic value for portfolios in creating and sustaining long-term value in a world where change occurs more quickly than ever.
Adopting and investing in ESG real estate strategies improves your company’s reputation and culture, enhances risk reduction and opportunity management, and can help increase your asset value, lower costs, and present sustainable financing opportunities. Environmental, social, and governance criteria all impact commercial real estate in a fundamental way.
What is ESG?
ESG is the standard for measuring your company’s commitment to sustainability. ESG performance has implications for risk management and affects operating costs in the real estate industry. ESG comprises three key factors property owners should consider when building and maintaining their portfolio:
- Environmental criteria refers to the environmental impact and stewardship a company has. Environmental building factors typically include a property's carbon footprint and address energy consumption, water usage, and waste management.
- Social criteria are how the company manages relationships with and creates value for stakeholders.
- Governance criteria deal with a company’s leadership and management philosophy, practices, policies, internal controls, and shareholder rights.
Environmental factors have a significant impact on a commercial real estate portfolio's risks and opportunities. Climate change, resource depletion, and environmental regulations all affect the commercial property value and performance.
While it’s agreed that these three factors are key in their impact on a business portfolio, there is no universal categorization for ESG issues, which sometimes makes them a challenge to maintain and measure.
As the business world continues to become more aware of the impact of climate change, and the impact on real estate, more businesses are taking notice of their role in impacting the environment long term. Energy consumption, water usage, and waste management all play a role in a business’s carbon footprint.
Climate change has a quantifiable impact on your real estate portfolio, whether it’s the physical impact of more frequent and more severe storms, the transitional risks associated with severe weather, poor air quality, and rising temperatures, or the social impact of groups that seek to limit damages big business can cause to their region and surrounding communities. These factors can cause changes in your portfolio.
A property located in an area prone to flooding may be at risk of damage from rising sea levels or heavy rain. A natural disaster like a hurricane could also cause severe damage to the property, potentially leading to lengthy downtime and lost revenue.
Resource depletion is another environmental factor that can impact commercial real estate. Natural resource depletion, like water and energy and resources used in the construction and maintenance of commercial properties, impacts businesses in a variety of ways.
For example, a commercial property that relies heavily on water for irrigation or cooling may face risks and additional costs from water scarcity. Energy-intensive buildings such as data centers may also face risks of rising energy costs or the depletion of non-renewable resources like fossil fuels.
Strong ESG investments can help ensure your real estate investments are protected, mitigate those risks, and prevent those costs from skyrocketing.
Many of the social impacts of ESG revolve around employee welfare, local economic impact, and ultimately, how a building delivers value to its tenants and the surrounding community.
Social issues can either improve or harm a company’s reputation, making it more subjective criteria, more difficult to quantify. But in general, companies can invest in their social impact in two ways: investing in making their buildings safe for occupants and the surrounding community, and taking an active role in supporting the community.
Both of these areas are generally about being good stewards to the community, employees, and acknowledging the role of those who live and work around your building. Making financial contributions to community groups and organizations are “giving back” to the community. This both helps your business mitigate social ESG issues and prevents a negative impact to your bottom line.
ESG commercial real estate issues often surround governance. How the business is structured and how it makes decisions is key in whether it is a positive steward. Company factors like compensation, DEI, business ethics, and transparency are all indicators of how the company is run and whether it’s creating a positive environment and adequately serving everyone who works there, not just ownership and management.
Maintaining ethical governance practices directly is tied directly to a company’s ability to build trust with its stakeholders. For most organizations, governance issues can be determined by answering these basic questions:
- What is the structure of executive compensation, and is it tied to ESG benchmarks?
- What are your organization’s business ethics pillars? Do you have transparency with stakeholders? What reporting practices and standards does the company have in place?
- Does your organization’s board of directors have a diverse, representative makeup?
Why is ESG important in commercial real estate?
ESG is a bona fide mission for real estate owners and managers, and ESG initiatives including the concept of reducing carbon emissions, creating green buildings, and making sustainable investments are proving to be legitimate needs throughout the real estate industry.
Increasing environmental concerns like extreme weather, and climate-related risks borne of recent catastrophic storms, global pandemics, natural disasters, and civil unrest have put a spotlight on social justice and climate change issues, and business has been tasked with improving their own environmental performance, become more civic-minded, and otherwise improve their environmental and social governance.
And why not? The US Department of Energy reports that buildings represent 40% of greenhouse gas emissions. Increasing external pressures and rising expectations surrounding social and environmental ethics have made it critical for companies to incorporate ESG into their portfolio if they hope to be sustainable in the long term.
And these efforts are also paying off for businesses. ESG initiatives have been proven to boost the financial performance of CRE assets. Sustainable practices decrease operating costs, increase property value, and improve tenant and employee retention, with a goal of a net-zero carbon footprint, which is not only environmentally sustainable, but is a signature ESG benchmark to strive for.
Popular ESG real estate certifications, standards, and frameworks
There are a variety of governing bodies, programs, and certifications that are designed to create ESG standards for commercial real estate managers. These organizations are key players in the ESG ecosystem and provide valued certifications that continue to establish standards.
This presents new challenges for ensuring these standards are met. Investors, tenants, regulators, and community stakeholders all have stakes that facilities are compliant and operate at a certain standard.
For building owners and managers, ESG software allows you to track certifications and standards, allowing you to easily track certification statuses and stay on top of reporting frameworks.
ESG commercial real estate certifications
The Leadership in Energy and Environmental Design (LEED) certification is a globally recognized symbol of sustainable achievement. Granted by the U.S. Green Building Council, LEED is the most widely used green building rating system in the world, and can contribute to meeting the United Nations Sustainable Development Goals. With four levels of certification (Platinum, Gold, Silver, and Certified), businesses can address carbon, energy, water, waste, transportation, materials, health and indoor environmental quality in a tiered manner.
The Certified Manager of Commercial Properties (CMCP) certification communicates an organization’s ability to be an effective commercial property manager. Backed by BOMA and BOMI Certification, Inc., the CMCP cert validates foundational knowledge in key property management areas and provides training on energy management and reducing waste.
The Building Research Establishment Environmental Assessment Method (BREEAM) is a UK-based certification that assesses sustainable methods for planning building projects for infrastructure and buildings.
An ENERGY STAR certification means your organization has a variety of tools and resources to identify cost-effective approaches to manage energy use in its buildings. Its online ENERGY STAR Portfolio Manager tool measures and tracks energy, water, and waste and material use. ENERGY STAR scores are considered an industry standard for green building certification.
ESG standards and frameworks for commercial real estate
Formerly known as the Global Real Estate Sustainability Benchmark, GRESB provides a rigorous methodology and consistent framework with a standardized, validated ESG data evaluating assets and portfolios based on self-reported data.
The Carbon Disclosure Project operates in the UK, Germany and the US, running the global disclosure system for investors, companies, cities, and regions to manage environmental impacts. Focused on investors, companies, cities, and governments, CDP focuses on building a sustainable economy by measuring and acting on their environmental impact.
The Task Force on Climate-Related Financial Disclosures was created by the Financial Stability Board to improve and increase climate-related financial reporting. TCFD's disclosure recommendations are structured around four themes, each representing core elements of how companies operate: governance, strategy, risk management, and metrics and targets. Their recommendations enable informed investment, credit, and insurance underwriting decisions that enable stakeholders to understand how carbon-related assets are concentrated in the financial sector.
Build an ESG strategy that’s right for your portfolio
Data collection is the key to creating a strong ESG strategy. Monitoring your company’s energy consumption isn’t easy, but with a strong ESG real estate software platform, you can gather the data you need and begin to create a plan. Contact Brightly’s experts and help your company take the first step toward building an effective ESG strategy.