ESG and the CRE Lifecycle
Shift from Saving to Strategizing
A strong ESG strategy involves more than just saving
For real estate owners and investors aiming to build ESG (Environmental, Social, and Governance) frameworks for high-performance portfolios, utility cost savings and operational efficiencies may come to mind. But viewed in a broader context, operational savings alone are no longer considered the main driver for incorporating an ESG strategy in commercial real estate portfolios. Across the lifecycle of a real estate investment, ESG is an important element that brings in strategic value, providing new sources of revenue, reducing operational costs, and mitigating risks.
In a poll by Ernst & Young and Institutional Investor on the importance of ESG information in their investment decision making, nearly 90 percent of investors agreed or strongly agreed that investments can only generate sustainable returns over time if they bring a sharper focus on environmental, social, and governance factors. A similar share of investors believe that ESG issues have real and quantifiable long-term effects on companies.
A strong ESG strategy boils down to deliberate actions at four key stages to create value and bolster competitive advantage.
1. Expedite Planning:
What applies in buildings also applies for building projects: a solid foundation is required for success. Pre-construction planning and financing require a multi-level sustainability strategy. Responsible investments present a lower risk, and demonstrating commitment to sustainability early in the process will eventually maximize return and therefore help attract investors.
2. Attract and Retain Tenants:
Sustainability-focused strategy yields an unparalleled competitive edge because it attracts tenants who think in terms of green space and buildings get filled faster and at higher rates. And once you secure tenants, how do you keep them? Environmentally-conscious buildings and spaces protect the health and comfort of occupants, and green workspaces are proven to enhance productivity, decrease absenteeism, and mitigate liability risks.
3. Optimize Operations:
Buildings with a sustainability strategy don’t just make for loyal and happy tenants. Investors and managers find it easier to monitor their portfolios, identify opportunities for improvement, and implement efficiencies. It also enhances outlier detection and simplifies creating plan of action for them. The data coverage required in buildings with sustainability programs offers increased transparency, and thus increased actionability, into building performance.
Technology will benefit the operations of even top-performing buildings, making it possible to automate the acquisition of thousands of complex data points and utilize them to achieve process efficiencies otherwise impossible for property management companies to do on their own. These automated processes eliminate the burden of manual data entry, saving work hours and redirecting manpower to other high-priority tasks. The power to visualize the performance of these buildings results in strong, actionable insights and enhanced reporting and sharing capabilities.
4. Increase Returns:
The value of an asset encompasses more than just land value and process improvements. Assets that boast sustainability as an integral part of their strategy appreciate faster, run with greater efficiency, and ultimately see higher returns on investment.
Comprehensive data coverage offers complete transparency, and well-managed data is a strong indicator of a well-managed asset.
ESG policies have a strong and quantifiable impact on the investment lifecycle. They enhance and simplify management, but moreover help maximize value on exit. Big data can be managed as a strategic asset with the right tools, and technology can gather the various pieces of a portfolio and unite them into an effective whole.
ESG is no longer a question of corporate citizenship; investment strategies that consider sustainability factors are proven to generate better returns. The case for greater focus on ESG strategy is now driven by academic research that demonstrates links between investments with solid ESG practices and improved operational and stock performance.
Larry Fink, CEO of BlackRock, wrote in his annual letter to chief executives at S&P 500 companies and large European corporations:
“ESG factors relevant to a company’s business can provide essential insights into management effectiveness and thus a company’s long-term prospects. We look to see that a company is attuned to the key factors that contribute to long-term growth: sustainability of the business model and its operations, attention to external and environmental factors that could impact the company…”
And now, commercial real estate investors can take it from here.
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