ESG in Real Estate

​Environmental, social, and governance (ESG) principles now guide the real estate sector. Since buildings add to global carbon emissions, investors and lenders push firms to incorporate ESG principles into their work. They expect clear proof of steps that minimize environmental impact.

The "environmental" part of ESG holds the real estate industry accountable for emissions from buildings. As such, firms must ensure best practices in material sourcing for construction, design energy-saving structures and employ renewable energy sources to lower harmful gas emissions. Although the sector has taken vital steps, such as getting green certifications for new constructions, the bigger challenge remains in assessing the environmental impact of older properties and upgrading them to meet ESG standards.

The "social" aspect of ESG demands commitment to corporate social responsibility (CSR). It calls for firms to build inclusive, equitable, and community-oriented spaces. For instance, investors and developers can build affordable homes, an action that addresses homelessness while assisting people across different income levels. Designing buildings for accessibility and integrating them well within the community meets social goals and improves people's quality of life. The social aspect also requires firms to ensure fair treatment and safety for everyone tied to a project, e.g., workers, material makers, and suppliers.

The "governance" pillar of ESG covers a real estate firm's internal rules and guiding structures. It checks a company's ethical standards and management integrity. This pillar requires companies to be open about their governance structures and follow fair legal practices in dealings. When investors consider real estate firms, they pay closer attention to their management frameworks, favoring those with clear lines of responsibility and solid plans for handling issues. They also review policies against corruption and bribery, diversity within leadership and oversight groups, and the broader impact of business choices on society.

Property technology (PropTech) - a blend of real estate and tech - plays a big role in cutting carbon and boosting ESG goals. These companies provide technology that the real estate sector needs to lower its carbon output, with some building digital systems to track and reduce emissions from properties. Others offer clean energy options such as solar panels and geothermal heat pumps to shrink the carbon footprint of buildings. PropTech also brings tools to monitor construction materials, manage waste, capture carbon, and assess a building's full lifecycle emissions.

While PropTech provides solutions to meet ESG targets, it faces challenges. Environmental issues, such as methane and refrigerant leaks from buildings, remain concerns, and transitioning to clean systems can be costly and difficult. Additionally, regulations, like New York City's Local Law 97, which mandates decarbonization, create compliance challenges. Meeting these standards requires significant investment, technical expertise for design and installation, and often overcoming infrastructure limitations.

Rising insurance costs, driven by climate risks and economic uncertainty, present an obstacle to achieving ESG goals in real estate. In 2023, skyrocketing premiums put financial pressure on affordable and student housing sectors. CRE investors responded by making their properties more resilient. They installed hurricane-proof roofs and upgraded infrastructure to reduce climate-related risks. These improvements help secure better insurance terms and provide opportunities for government incentives.

Industry events also spotlight ESG, showing how weaving sustainability into investment plans and daily operations can boost asset value and lead to responsible development. These forums unite influential figures - major capital providers, developers, property owners/managers, and consultants - for deep dialogue and knowledge sharing. Events like Nareit's (National Association of Real Estate Investment Trusts) REITworld signal that ESG principles are now a basic industry concern rather than a passing trend.

Maria Stamolis

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