ESG And CRE: What The Industry Needs To Know And How To Leverage It For Long-Term Value
The spotlight on environmental, social and corporate governance in the U.S. is getting brighter, especially as it relates to commercial real estate. In August, President Joe Biden signed the Inflation Reduction Act, aimed at helping people reduce their carbon impact. The act is viewed as the biggest federal climate package in the U.S. to date. All the signals suggest real estate will be subject to tighter ESG regulations over the coming years.
To prepare, the commercial real estate sector needs to understand exactly what ESG is and what imminent regulation involves, said Thru Shivakumar, CEO and co-founder at smart building software company Cohesion. Changes will come quicker than many expect.
“Commercial real estate owners, operators, developers and fund owners want to deliver asset value,” she said. “Adopting a robust ESG strategy is a means to gain the competitive advantage everyone is chasing while ensuring a portfolio is resilient to what we just experienced and what’s to come.”
Cohesion has created a guidebook to help the CRE industry gain access to the information it needs about ESG: How to Leverage ESG for Long-term Value in Commercial Real Estate. The goal of the guide is to answer CRE owners’ and operators’ questions about ESG, bring clarity to concepts and solutions, outline the various certifications and agencies, and explain how ESG is a necessary part of business today versus a nice-to-have for firms with the deepest pockets.
How to Leverage ESG for Long-term Value in Commercial Real Estate starts by offering a robust analysis of what exactly ESG is as it relates to CRE. It introduces ESG as a top-down method of doing business — rather than just a marketing tool — that focuses not only on the environment, but on people, communities and good business practices. It showcases how businesses that take a longer-term view of ESG will become more profitable.
“Real estate is historically a reactive industry,” Shivakumar said. “In the past, real change only happened when the sector was forced to because of outside factors. But when you look at what’s happening across the world right now, not just with the rise of ESG but the rise of new macro fundamentals such as hybrid work, shorter tenant lease cycles, healthy buildings and a reduction in office space demand, it is imperative for CRE owners to be proactive because these changes are here to stay.”
The guidebook gives details about recent regulatory changes that are coming into force. For example, the Securities and Exchange Commission has proposed rules to standardize climate-related disclosures on behalf of investors. A further proposal made by the SEC is that all companies that claim to promote ESG initiatives must fully disclose portfolio information and provide progress reports.
“Evidence suggests enacting ESG initiatives corresponds directly with government and customer support, reduced regulatory intervention and an increase in employee productivity,” Shivakumar said. “The real estate industry is in a transformative state and those owners and operators seeing opportunities rather than challenges really shine and outperform the competition through data and ESG strategies.”
Being proactive means bringing ESG into the center of a business strategy, Shivakumar said. Companies can take action, such as appointing a team to champion ESG and investing in the right technology and data tools to measure, track and drive sustainability goals.
Cohesion’s guide has a section on how to implement ESG strategies within an organization. This includes information on how to best use ESG frameworks, benchmarks and certifications, and provides a market map of the most credible resources available.
The guide also outlines how understanding ESG can provide opportunities as well as compliance. For example, it provides information about tax deductions for buildings that meet environmental standards and how CRE businesses can access finance for ESG infrastructure projects.
Approaching ESG doesn’t have to be completely overwhelming, Shivakumar said. Once an organization better understands ESG strategies and what they could mean for the firm, it may find that many of its practices already meet certain social standards, regulations and benchmarks.
“Many organizations are currently doing things that count toward ESG without even realizing it — touching on the social aspect, training staff, helping communities,” she said. “In this case, all they need to do is arrange the data and they could find they have already met 50% of regulations.”
A large part of meeting regulations will be presenting information in the right way. Numerous studies indicate the key to proper reporting and disclosure is to embrace data, Shivakumar said. Aggregated and contextualized data is essential for ESG reporting to avoid greenwashing and cherry-picking information.
“ESG can be daunting for CRE companies,” she said. “All the building systems, human operations and software solutions are disparate, so there’s no real access to structured and standardized data. The industry, in general, is operating on dated processes that create inefficiencies and an inherent inability to measure and monitor areas of real value.”
Many organizations are turning to proptech to help source reliable ESG data, Shivakumar said. Smart building technology helps property companies address urgent challenges. It can integrate with their building systems and organize human experiences to bring all information into one centralized hub, which is essential to create and share ESG reports confidently and more efficiently.
If ESG is embedded in an organization and adequately reported, it has the potential to solve other problems. The guide has a section called “Utilizing Technology to Support your ESG Strategy in Response to a Changing Industry,” which points out that proptech can also help CRE tackle the radical sector changes spurred by the pandemic, such as how people are using office space in very different ways. Focusing on people will help ensure real estate meets a tenant’s needs, which results in less turnover and increased asset value.
“In an industry known for slow adoption and being reactive rather than proactive, adopting ESG reporting best practices now will allow companies to be at the forefront of the ESG landscape,” Shivakumar said. “Setting a precedent in this regard can translate into a core competency, which sets them apart from competitors in the way they satisfy tenants and increases investor value.”
This article was produced in collaboration between Cohesion and Studio B. Bisnow news staff was not involved in the production of this content.
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