9 minute read 7 Feb 2020
Skyscrapers in London

Four pillars impacting sustainable sustainability in real estate

By Kyle Bolden

EY US-East Region Market Segment Leader – Real Estate, Hospitality and Construction Sector

Trusted advisor to high-growth companies that are transforming the real estate industry through innovation.

9 minute read 7 Feb 2020

Find out how real estate companies are leveraging non-financial measures to create sustainable long-term value that meets the shifting demands of stakeholder expectations.

With climate change, income inequality and social justice front and center in daily headlines, real estate stakeholders are demanding greater transparency as it relates to how companies interact with and impact the communities in which they operate. Investors, regulators and society as a whole are looking to assess these nonfinancial measures to determine the true long-term value of a company. Environmental, Social and Governance (ESG) is gaining prominence with respect to investment decisions and the determination of capital allocations, especially with regard to the global real estate industry. But how are organizations meeting these expectations while also meeting the bottom line?

Construction of high rise buildings
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Chapter 1

Impacting the Environmental pillar of ESG

Public and private efforts are reducing the energy consumption needs of a growing population. And that’s just the beginning.

The construction and operations of buildings have been shown to account for 40% of worldwide greenhouse gas (GHG) emissions,¹ and with such a massive carbon footprint, nations, local governments and companies are continuing to set carbon reduction goals with an eye to becoming as carbon-neutral as possible.

In New York City, the Mayor’s Office has launched a public-private partnership to decrease GHG emissions for commercial buildings by at least 30% over the next 10 years as part of the effort for the city to reduce GHG 80% by 2050.² To achieve these goals, companies are sourcing energy from renewable resources and using new technologies and data analysis to aid in reducing energy consumption, waste diversion programs, and decreasing water usage through efficiencies and conservation. Reducing emissions not only reduces carbon output but also provides long-term value by reducing energy costs, creating operational efficiency and extending the useful life of building systems.

Other entities, such as US-based equity REITs, have issued more than $3 billion of green bonds since the summer of 2018, which finance new or existing projects that are meant to have positive environmental or climate effects. According to the nonprofit Climate Bonds Initiative, the global green bond market hit a milestone in 2019 when new issuance surpassed $100 billion. All things being equal, if faced with the choice of investing in or issuing a regular bond or a green bond, many investors are opting to invest in a green bond.

Industry sector examples

Within the construction industry, building sustainable and energy-efficient structures is essential to business success. Offering homebuyers environmentally conscious features like rooftop solar panels, LED lighting, improved insulation and smart-home technology plays well in the eyes of both the consumer and investor as it’s both intentional and measurable (e.g., lower utility bills, reduced water usage, renewable solar energy).

There is also a growing interest in zero energy buildings (ZEBs), and several countries have adopted or are considering establishing ZEBs as their future building energy targets to help alleviate the problems concerning the depletion of energy resources and the deterioration of the environment.

Read the full article here to know more.

An engineer standing on a field on wind farm
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Chapter 2

Impacting the Social pillar of ESG

Organizations that are meeting newly-defined expectations, while also meeting the bottom line, are reaping the rewards.

Public and private efforts

Leading public and private organizations are developing innovative programs that are simple, effective and powered by eager volunteers who want to give back to their community.

Companies are also focusing on community involvement partnerships with not-for-profits that align with their businesses, such as disaster relief programs, housing support, and job assistance and training programs. Employee participation initiatives have also become key to providing a strong bond with the community and a greater sense of community for their employees, particularly with millennials, who show increased loyalty to companies that care about their effect on society. These programs can lead to greater satisfaction from customers and happier employees, increasing profits and decreasing employee turnover. 

Green living facade of the building
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Chapter 3

Impacting the Governance pillar of ESG

How governance aspects of sustainability are providing structural support to the ways in which organizations interact with and impact the environment, their employees and their communities.

Establishing and building upon formal programs

Companies are increasingly focusing on establishing or building upon formal programs in areas such as employee wellness, investing in expanded health care, flexible work arrangements, maternity- and paternity-focused programs, and expanded counselling programs including mental well-being, financial planning and career planning.

Leadership, oversight, operations and performance of these and other programs are crucial to being successful both financially and as corporate citizens as they increase stability, transparency, and employee retention. It’s paramount to have the proper processes, protocols and policies in place to monitor these programs, and success results when a diverse group of executives leads them. Instituting the correct tone at the top shows an organization’s commitment to transparency, accountability and actions that are in line with sustainability and responsible social policies.

If you are doing it, report on it

Many real estate companies are already including ESG information as part of their investor and public reporting and include numerous key performance indicators, including energy usage, GHG emissions, waste management (recycled and composted vs. landfill), number of LEED or Energy Star assets, and employee mix data, among other metrics. In addition to providing reporting for their stakeholders, companies participate in a variety of external reporting programs including the Global Reporting Initiative, LEED, Energy Star, Nareit and others, allowing the industry to compare and benchmark its progress as well as spotlight and recognize leaders in the field.

Hotel owners and operators have emerged as natural born leaders in the sustainability conversation. In the summer 2019, ULI released its Greenprint Report, which highlights best practices that the hospitality sector has implemented to increase energy efficiency, conserve water and reduce waste. No longer is it acceptable to rely upon those dubious signs in the bathroom that ask hotel guests to consider reusing their towels in an effort to help the environment.

Industry and governance organizations getting into the act

Another important barometer to consider is the growing ESG guidance and award programs sponsored by highly respected real estate industry organizations. For example, each year Nareit issues an award to the member REIT that has demonstrated superior and sustained sustainability practices.

In November 2018, the Sustainability Accounting Standards Board codified standards by sector, including real estate, to identify, manage and communicate to investors sustainability information that is financially material. The standards were designed to help investors by encouraging reporting that is comparable, consistent and financially material, thereby enabling investors to make better investment and voting decisions. Key disclosure topics include energy management, water management, management of tenant sustainability impacts and climate change adaptation.

To know more about these factors, read the full article here.

Skyscrapers construction
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Chapter 4

Investing for impact in the real estate sector

Impact investing approaches that correlate profitability with sustainability

Impact investing

Investment in climate change has moved a long way since the signing of The Paris Agreement in 2015, but challenges and opportunities remain. Bill and Melinda Gates noted in their 2019 annual letter that “if we’re going to solve climate change, we need to get to near-zero emissions on all the things that drive it — agriculture, electricity, manufacturing, transportation, and buildings.”

There has also been a rise in the number of pension funds looking to invest in such strategies. In the US, sustainable, responsible and impact investing (SRI) assets grew by as much as 38% from 2016 to 2018, according to the Washington, DC-based membership association US SIF Foundation’s 2018 report, which found that SRI assets now account for $12 trillion of the $46.6 trillion in assets under professional management in the US.³

Affordable and workforce housing are among several of the many asset classes that have the potential to achieve measurable social and environmental benefits combined with financially rewarding investment performance. Still, it will take a lot of change and innovation to make ESG a central priority.

Opportunity Zones

Opportunity Zones, created through the Tax Cuts and Jobs Act, are census tracts primarily located in low-income areas that were nominated by states and subsequently designated by the IRS as “qualified opportunity zones.” While it is unclear whether the program will spur jobs and economic development, Opportunity Zone-based projects have the potential to incorporate green initiatives, such as clean energy and sustainable development, in the 8,700-plus zones designated across the nation. Time will tell whether the attraction of capital gain tax deferral and partial forgiveness of additional gains on investments in Opportunity Zones will attract patient capital and deliver higher returns to investors while simultaneously making an impact with their investment dollars.

The “ultimate” customer experience

Leadership in Energy and Environmental Design (LEED), a green building initiative that aims to help building owners and operators be environmentally responsible and use resources efficiently, has partnered with the International WELL Building Institute, a public benefit corporation whose mission is to improve human health and well-being in buildings and communities across the world through its WELL Building Standard™ (WELL™). LEED and WELL are working together to demonstrate that green building and health and wellness go hand in hand. This partnership plays a prominent role in addressing the Environmental Protection Agency’s statistic that Americans spend a staggering 90% of their time indoors. As employers continue to focus on attracting and retaining appropriate talent, they are increasingly placing emphasis on their employees’ physical health and well-being. WELL Building Standard focuses on seven concepts: air, water, nourishment, light, fitness, comfort and mind.

The value of ESG information in a market downturn

As noted by Mathew Nelson, EY Global Climate Change and Sustainability Services Leader, “ESG information plays an increasingly important role in the investment decision-making process, and respondents believe that ESG factors can help mitigate downside risk.

In the world of irreversible consequences, more will need to be done to raise awareness of the benefits of ESG and sustainability, of the detriment of not leaning in on the topic of socially responsible investment choices, and of the leadership role that real estate stakeholders – developers, property owners, investors, regulators, lenders and users – must take in the conversation.

Summary

With climate change, income inequality and social justice front and center in daily headlines, real estate stakeholders are demanding greater transparency as it relates to how companies interact with and impact the communities in which they operate. Investors, regulators and society as a whole are looking to assess these nonfinancial measures to determine the true long-term value of a company. Environmental, Social and Governance (ESG) is gaining prominence with respect to investment decisions and the determination of capital allocations, especially with regard to the global real estate industry. But how are organizations meeting these expectations while also meeting the bottom line?

About this article

By Kyle Bolden

EY US-East Region Market Segment Leader – Real Estate, Hospitality and Construction Sector

Trusted advisor to high-growth companies that are transforming the real estate industry through innovation.