While Environmental, Social and Corporate Governance (ESG) investing can mean different things to different people, institutional investors overall believe that implementing ESG practices is critical to helping the environment and communities – plus, it leads to better results for all stakeholders involved. We’re already seeing it play out in real time.
ESG in Practice
When thinking about the environmental component of ESG, going “green” and instituting sustainable initiatives are a great way to reduce the environmental footprint of a property, lower unpredictable utility costs, and improve operational performance and tenant satisfaction. MacArthur Foundation’s research brief cited that retrofitting the entire multifamily housing stock could save $8 billion a year in energy costs and cut electricity consumption by about 15 percent—the equivalent of the energy use by 4.7 million U.S. households annually.
Implementing green and sustainable initiatives into current or new properties will ultimately result in increased property values. Many institutional investors are keen on developing or acquiring LEED certified buildings, which they believe over time will yield higher risk-adjusted returns. These properties are found to be more efficient to operate and attract more environmentally conscious renters who are often willing to pay more in rent to live in an energy-efficient building.
From a “social” perspective, affordable housing is an increasing area of focus. Providing cost-burden households with clean and safe housing addresses income inequalities head-on, and improves family health, education and economic steadiness. There are also opportunities for going “green” within the affordable housing sector, which often faces the same issues found in conventional multifamily properties –older buildings with less efficient cooling and heating systems, and other energy-consuming features. Energy costs remain one of the primary challenges for affordable rental housing to qualify as affordable.
Benchmarking ESG Value
The percentage of both retail and institutional investors that apply ESG principles to at least a quarter of their portfolios jumped from 48 percent in 2017 to 75 percent in 2019, according to BNP Paribas CIB’s 2019 ESG Global Survey. As institutional investors place greater importance on ESG policies and practices when determining whether to invest, investment managers are feeling the pressure to implement ESG-driven strategies.
With that, measuring the direct impact that ESG has on real estate projects will need to become more transparent over the next several years, as broad ESG practices and adoption continue to be applied by investors. Currently, approximately 100 institutional investors, including pension funds and insurance companies, are using GRESB (Global Real Estate Sustainability Benchmark) as a standard for their ESG investments. While GRESB is a relatively new benchmarking index, it has become a fundamental part of investor due diligence and investment management reporting to show operations as a result of instituting ESG driven strategies and practices.
From interest rate savings and fixed utility bills to overall positive impact from environmental and social initiatives, ESG efforts will ultimately lead to maximized value and returns for investors, owners and tenants alike. For these reasons, we expect more funds and investors to pay close attention to ESG driven strategies, operating practices and overall performance going forward.