ESG and Sustainability in Real Estate: Two sides of the Same Coin

The deliberations that began with sustainability soon grew to include ESG accountability in the industry. Over the years, these factors have become an integral part of organisation strategies as they benefit stakeholders not only from a financial returns perspective but also from an environmental sustainability standpoint. Today, investors and bankers are looking beyond the traditional financial indicators to assess sustainability, larger impact on the community and environment before arriving at investment decisions. Thus, ESG factors are gaining importance while evaluating a company.

Sustainability and ESG necessitating urgent commitment

According to the Intergovernmental Panel on Climate Change (IPCC), the world is now nearly 1° Celsius warmer than at any point of time in the past nearly 200 decades, and it is anticipated to become warmer by 1.5° Celsius by 2040. To limit global warming, the world needs ground-breaking and bold solutions to enable industrial decarbonization and eliminate approximately 40% of global emissions.

Existing built environment, one of the largest energy consumers and emitters of GHG emissions, has been estimated to require USD 5.2 trillion over the next decade alone to decarbonize. The industry, thus, must aim to cut emissions by 50% by 2030 and be net zero carbon by 2050 to conform with the Paris Agreement and limit rising temperatures to 1.5° Celsius. Hence, assessing and incorporating ESG parameters into real estate and construction is vital for countries to be able to achieve their sustainability goals.

Green buildings as agents of change

The pandemic amplifying the demand for green buildings, and with return to office being normalized, the need for green buildings has gained significance. Today, companies and employees alike are aware of the role that workplaces play in physical, mental, and community health,  and that has further crystalised the demand for green buildings. Given India’s commitment to achieving a net zero carbon target by 2070, the push and enthusiasm from within the corporate world will go a long way to attain greener and more sustainable spaces. The focus on sustainable buildings has also been impacted by the fact that investors, as well as occupiers, are aligned with ESG compliance requirements. When compared with conventional structures, buildings with stronger environmental credentials that depict ESG compliance generate higher rents, fetch higher sale prices, increase retention rates, and demonstrate lower rates of obsolescence. These enhance the valuation of green buildings, leading them to be considered secure credit assets and credible collateral.

A mindset shift among real estate stakeholders

Not surprisingly, real estate projects with green certifications such as LEED, or WELL certification, et al., are increasingly being preferred by stakeholders, with many investors integrating ESG criteria into their investment strategies. As a result, most mature international markets today are witnessing certified green projects charging a higher rental than non-certified ones. Investors are even being led to consider retrofitting existing properties for steady economic and environmental performance.

Real estate, thus, has become a medium for delivering net zero carbon goals. More organizations now see this as a period for real progress to be made with respect to setting and achieving ambitious net zero goals for 2030 or if possible, even sooner. However, this will require real estate companies to make complex changes in what will be a critical shift for the whole industry and allied industries as well. In 2021, SEBI  introduced new reporting requirements for sustainability by adopting Business Responsibility and Sustainability Reporting (BRSR) guidelines. These regulations will help improve ESG disclosures, thereby promoting transparent, standardized, and improved disclosures, easier comparability across sectors and periods, and help companies quantify their progress with respect to sustainability objectives and long-term value creation. It will also enhance investors’ ability to make informed ESG-related decisions.

ESG providing an edge and building trust

Organizations too are looking at a broader view of their corporate philosophy and decisions, taking into consideration the social impact of these values. They acknowledge that the industry holds accountability for building trust with its investors by establishing the well-being of occupants and the surrounding communities. Additionally, the trust gained by the creation of increased transparency in its operational aspects following ESG compliance helps stakeholders get approvals and licenses easily, thereby enabling their expansion in existing markets and entry into new ones unconstrained.

Investors driven by a need to adhere to regulatory and environmental protection requirements have been finding it gainful to continue including ESG metrics in their strategies. They have realised that incorporating ESG considerations into each phase of the property lifecycle essentially helps preserve future asset value and improve brand image. Financial institutions, too, are paying increased attention to developers who follow sustainability initiatives and have a clearer ESG structure in place.

Onus on real estate to flatten the climate curve

Today, we are at the cusp of a new age of responsibility for a resilient and sustainable future. ESG is fast getting incorporated into developer and investor objectives and is turning into a key factor in decision-making. The responsibility of the developers to conform with ESG parameters has presently widened to include not only investors, financial institutions, and relevant authorities but also occupiers, given their individual/ organisations’ commitment towards achieving net zero goals.

On this front, India has huge development potential and holds vast opportunities to come up with new real estate projects that uphold ESG values, unlike developed nations that largely require retrofitting or refurbishment of the existing structures to become ESG compliant. Thus, with requisite policies in place as well as able support from the government, as evidenced by its focus on sustainability in the Union budget 2022, India would well be on its way towards creating a sustainable built environment and achieving its net zero ambition.

Views of the author are personal and do not necessarily represent the website’s views.

Shrinivas Rao, a founding member of Vestian Global Workplace Services, is responsible for Vestian’s growth and expansion in the Asia Pacific region. With over 25 years of experience in global real estate industry, Shrinivas has assisted various multinational corporations with portfolio planning, strategic consulting, expansion/ relocation and project delivery, to achieve their real estate goals in key Asian markets.