By Nate Mallon, Managing Partner, Verada
Over the past few years, sustainability has become a key priority for several industries. In the real estate sector, for example, Environmental, Social, and Governance (ESG) has become the primary focus of many firms. Real estate companies representing all types of assets, including commercial, residential, and retail property, have developed ESG plans that positively impact the environment and ensure progress toward achieving social and governance goals. Research has actually found that such plans help real estate owners and operators attract worthy investors and partners and promote positive relationships within their surrounding communities. Let’s explore further.
What is ESG?
ESG, or environmental, social, and corporate governance, is a method to evaluate how much a corporation works on behalf of social goals. Here’s a snapshot of how ESG relates to real estate.
The environmental facet of ESG addresses a broad range of issues, including climate change and pollution, as well as the energy efficiency and carbon footprint of a building. Thankfully, appreciation for sustainability concerns has increased at all levels of the real estate industry and has been accompanied by growing governmental regulations. Real estate firms and property owners have developed ESG plans designed to mitigate their assets’ environmental impact and raise awareness regarding its vulnerabilities. Many property owners are even looking to contribute to ESG progress by focusing on how to reduce their carbon footprint and reach net zero emissions.
Socially, solid ESG plans help firms build rapport with their employees as well as the community. Many real estate companies are following suit in developing corporate social responsibility (CSR) initiatives and building the practices into their operational structure. Firms fully dedicated to the cause are even considering ESG and CSR initiatives just as crucial as net profits. When executed correctly, ESG plans within the real estate industry can have a domino effect, with corporations, their employees, and the community they operate in taking action to reduce their overall impact.
In addition to focusing on the company’s environmental and social impact, businesses are establishing strong governing practices to hold themselves accountable and achieve long-term ESG goals. However, with ESG concerns being relatively new, companies have found that keeping track of such metrics and collecting data can be problematic. Thankfully, new technologies and proptech companies have emerged that can assist in this process. Investors should expect to see periodic reports detailing a company’s progress on these issues.
Verada Retail has first-hand seen an influx in ESG concern by both landlords and tenants. In NYC, more landlords are considering ESG practices during initial property acquisitions and development phases, working with professionals who fully understand specific uses with ESG in mind. Tenants are also questioning which spaces best suit their business and ethical needs. Not only do they want a space conducive to their operations, but they also want one that supports the ongoing fight for an improved future. They, too, are relying on the services of NYC leasing experts to guide them to find just the right location.
ESG in Retail
Retailers have already felt the pressure to focus more on sustainability from the government. Now, customers are joining the call for businesses to develop ESG plans that meet changing consumer demands. Today’s shoppers find sustainable environments more attractive, and a sound ESG plan can help retailers meet the growing demand for a clean and healthy shopping environment. Additionally, investing in sustainable solutions positions retailers to better compete in today’s market and increase foot traffic by creating differentiated and desired experience-driven environments. A commitment to ESG shows that retailers are aware of society’s critical issues and are committed to alleviating how they contribute to them.
The Importance of ESG to Investors
Like consumers, investors are also taking a greater interest in the ESG plans of real estate businesses and property owners. While many factors affect the decision-making of investors and the value of their real estate assets, ESG is becoming increasingly more important. ESG plans are coming into play among real estate investors who want to make globally conscious, sustainable choices. Real estate-associated companies that take initiatives to promote change are likely to see an increase in investor activity – a trend that is reshaping the traditional profit-only driven mindset of investment firms.
Beyond investor concerns, public opinion is also extremely important for any company. Real estate firms rely upon the community – including tenants, businesses, and consumers – to add value to their real estate. Without this community support, real estate companies risk experiencing increased vacancy or declining sales in their assets – both negatively impacting the property’s value. Furthermore, with low community support, real estate companies often experience a decline in investor and partnership interest. Therefore, creating an ESG plan that is both strong and long-term and positively impacts the surrounding community is vital.
ESG in Action
Fortunately, large retailers have proactively responded to increased ESG demand. For example, Microsoft has seen an increase in investor activity due to its strong ESG plan. The company has received high marks in energy management, systemic risk management, and employee engagement in diversity and inclusion. Best Buy is seeing similar results because of its ESG plan. The company has started to reduce its carbon footprint and has pledged a 75% reduction by 2030. Other companies are starting to take action as well. Real estate owners like S.L. Green has partnered with tenants to achieve meaningful energy reductions.
Thanks to available data and data sharing technology, real estate firms, tenants, and consumers can all be held accountable, leading to an increase in policies and programs designed to reduce emissions, electricity, water, and waste.
ESG and the Future
ESG and sustainability regulations are sure to change and evolve. With the current status of our environment, we are likely to see stricter regulations and more laws put into effect. Real estate companies need to stay on top of their ESG plans and be transparent with the public, including shoppers, in the case of retail real estate.