ESG AND ITS EFFECTS ON REAL ESTATE INVESTING

ESG AND ITS EFFECTS ON REAL ESTATE INVESTING

WHAT IS ESG?

With the surge of severe climate-related and economic issues and growing recognition of social inequity, ESG, an Environmental, Social, and Governance acronym, is increasingly becoming a crucial criterion for businesses and real estate investment.

Today, ESG is no longer an emerging trend but an essential element of real estate investment and a top priority for investors at the different stages of the asset’s life cycle, from screening prospective acquisitions to construction development and optimizing the building’s energy usage to improve potential profitability. Companies are facing a growing need to assess property resiliency to manage risks pro-actively.

ESG BACKGROUND AND EVOLUTION
ESG is best described as a non-financial set of criteria used by investors to assess a company’s sustainability and performance (on these metrics) compared to its peers. Before ESG, organizations focused on Corporate Social Responsibility (CSR). However, ESG is not replacing CSR. The main difference between them is:

  • ESG: a measurable sustainability assessment, increasingly used by investors.
  • CSR: a self-regulating business model and sustainability framework.

ESG started as a socially responsible investment in the 1960s and has emerged more as a proactive movement in the late 2010s and into the 2020s. In 2015, the United Nations (UN) codified the ESG criteria in its Sustainable Development Goals (SDGs).
Currently, the usage of ESG has significantly increased due to growing concerns about environmental, economic, and societal problems. In addition, the COVID-19 pandemic has underlined the importance of ESG as risk management, transparency, resiliency, and social engagement (ESG’s main outputs) attract attention.

ENVIRONMENTAL
The environmental pillar of ESG refers to the organization’s environmentally friendly practices and monitoring of the investment’s impacts on the planet. In Real estate it mainly focuses on buildings’ energy efficiency and GHG emissions, as real estate accounts for about 40% of global carbon emissions. These factors are assessed against “green” rating systems such as BREEAM, LEED, Display Energy Certificates (DECs), and Energy Performance Certificates.

To implement more environmentally friendly measures, investors must reduce the energy consumption of the building through renewable energy, sustainable construction materials and methods, and monitoring water usage and waste disposal.

SOCIAL
The social pillar of ESG refers to the investment’s social impact on its communities, customers, employees, and other stakeholders. When it comes to real estate, it mainly focuses on the health, rights, and well-being of people inside and outside the organization. Investors can drive a more positive social

Impact by considering the community and employee welfare equally with financial objectives, hiring socially responsible candidates and assigning internal resources dedicated to the ESG initiatives. Though not as straightforward as environmental considerations, social measures drive long-term revenue.

GOVERNANCE
The governance pillar of ESG refers to how an organization is run, led, and managed. ESG analysts aim to understand better how the company is legally and financially compliant, how leadership practices are aligned to stakeholders’ expectations, how shareholders’ rights are considered, and the internal controls that exist to enhance accountability and transparency by leadership.

To fulfill governance-related standards in ESG, investors should adopt fair decision-making approaches and board selection methodologies, communicating them to stakeholders transparently.

Common ESG issues and areas of concern are:

ESG AND ITS EFFECTS ON REAL ESTATE INVESTING | Land Sterling

ESG INVESTING BENEFITS
ESG enables investors to assess risk versus rewards and potential areas of growth of an investment. Investors also believe that the more proactive a company is with its ESG policies, the more attentive and responsive it will be in mitigating risks. Consequently, a firm ESG policy adds value to the investment by reducing operating costs, maximizing returns, and increasing capital demand.

ESG IN THE UAE
Companies in UAE are increasingly adopting ESG in two folds: voluntary and compliance with regulations. Currently, the United Arab Emirates Securities and Commodities Authority (SCA) requires public joint stock companies (PJSCs) listed in the UAE to comply with certain ESG disclosure requirements. PJSCs must also comply with the Global Reporting Initiative (GRI) standards and sustainability standards issued by the Dubai Financial Market (DFM) or Abu Dhabi Security Exchange (ADX). In addition, some government organizations and unlisted companies have also published annual sustainability reports.
To align with the UAE national Vision 2021, the ADX has also pledged a commitment to fostering sustainability in the financial markets by becoming a part of the Sustainable Stock Exchanges (SSE), a United Nations-led initiative. In addition, the ADX has set down ESG disclosure guidance to aid the path for sustainability reporting. The emphasis on ESG reporting aligns with the UAE vision of attracting

 

Author

Vinodh Mahadevan

Head of Valuations & Advisory

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