​How ESG transforms the Real Estate Sector

ESG is a framework that allows investors to measure the impact of their real estate investments across environmental, social and governance-related factors. Achieving data-driven ESG certifications can prove valuable to investors in the form of additional funding, exclusive lending opportunities, and more. With ESG now playing a much more prominent role in how companies operate, ESG real estate considerations have become a top priority for investors throughout the asset lifecycle, from screening prospective deals to acquisition, asset management/ building development to disposal, and of course, whilst optimizing building energy usage in servicing tenants.

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Top observations during the journey of adopting the ESG framework for most property investors, owners or operators:

1. Clever refurbishment & asset management

Commercial viability and responsible investing remain key considerations throughout the investment assessment process. Value addition through refurbishment is a particularly useful lever when the investors cannot rely on property markets to keep rising. More attention is paid to energy efficiency & the reduction of embodied carbon during the construction/redevelopment of the building. A detailed asset management plan captures opportunities to add value and track progress towards achieving both commercial performance and ESG targets. Newly installed smart facilities management systems can also help Asset Managers to ensure the ESG benchmarks are successfully met.

2. Energy-conserving and net-zero carbon buildings are the new norm.

It is not a secret that Real Estate industry is a major consumer of energy. With operational emissions (energy consumed to operate building) accounting for 28% of all global and embodied carbon emissions (materials and construction processed during the entire building lifecycle) generating a further 11%, landlords, operators and occupants are under pressure to reduce their carbon footprint. This can be achieved by adopting renewable energy, using sustainable construction materials and smart building technologies to monitor heating, ventilation, water usage and waste disposal.

3. Environmentally friendly buildings with low carbon emissions yield higher rents

Carbon reduction efforts plays a prominent role in preserving asset value as tenants and occupiers increasingly shy away from properties with subpar environmental performance. As occupiers and investors are drawn to properties that are deemed more sustainable (ie LEED-certified office buildings), these Green assets will be able to command higher rent and eventually improve investment performance by generating a higher IRR for investors. Investors with Net-zero goal will unlikely invest in properties which don’t meet the ESG standards.

4. Sustainable construction materials

Beyond energy usage, sustainable materials are another ESG factor that real estate investors should take into consideration when building a greener portfolio. Rather than concrete and steel which emit greenhouse gasses during production, developers are moving towards other viable alternatives, such as timber which is much more environmentally friendly due to carbon sequestration. Chemically tested timber contain resilient fire-proof qualities and perform well in earthquake resistance tests. Using Timber can also reduce construction time significantly due to pre-fabrication.

5. More stringent regulatory requirements

Many investors have formally included carbon neutrality objectives in their new investment strategies, and are demanding higher green reporting standards. Fund Managers are required to disclose how the sustainability risk in their investment processes could potentially have a negative impact on the financial return of an investment.

The following Green building code / Sustainability benchmark are an important measurement of a buildings environmental performance:

• Leadership in Energy and Environmental Design (LEED)
• Global Real Estate Sustainability Benchmark (GRESB)

6. Fostering a socially responsible corporate culture, driven by leadership

Another driving force behind ESG real estate standards is corporate social responsibility and good governance or the idea that firm leadership must foster a culture aligned to its values (i.e. ‘’doing the right thing’’). Sharing corporate values allow employees to rally around a central mission, with full awareness of those goals. It is also crucial for firms to implement policies toward achieving optimal diversity, equity and inclusion (DEI). A strong ethical work environment allows companies to strengthen operational resilience and be better positioned to withstand problems such as economic volatility, health-related risks (ie Covid) and disruptive competition.

7. Setting benchmarks on real estate ESG data-driven progress

Making strides towards improved real estate ESG policies is only the first milestone; the next is routinely measuring progress and reporting to stakeholders. Measuring progress against internally set benchmarks, as well as the industry benchmarks above is critical to channelling private investment towards sustainable investments whilst preventing green washing.

Without visibility across your portfolio into current metrics, it is challenging to validate existing efforts and plan for future measures. ESG data enables investors to make informed decisions which require asset managers to enhance monitoring and analysis across their portfolios and to strengthen tenant engagement to obtain data on building performance and identify opportunities for improvement.

8. Sustainability-linked loans awarded to Real Estate companies

More Real Estate companies (Developer/ Operator/ REIT/ Fund Manager) have secured their maiden sustainability-linked loan, where the loan may also incorporate interest rate reductions linked to pre-determined ESG targets, allowing companies to enjoy savings in borrowing costs as it achieves these ESG targets.

​The proceeds of the loan can then be used for refinancing maturing debt, capital expenditure for new development projects, and/or potential land and property acquisitions which also act as an incentive for companies to speed up their decarbonization and energy transition progression.

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ESG talent is in demand

Aurex Group welcomes professionals with following ESG related skillsets to have a chat for future job opportunities in Real Estate/Real Assets sector:

• ESG focused Asset Management
• Responsible Investment / Impact Investing
• Sustainable Lending / Financing
• Sustainability Program / Transformation Management
• Sustainability Data and Reporting
• ESG Research (industry trends)
• DEI specialist

References:

• https://www.dealpath.com/blog/esg-real-estate-investors/
• https://www.canadalifeassetmanagement.co.uk/market-insights/esg-in-property-adding-value-through-refurbishment-and-repurposing/
• https://www2.deloitte.com/ce/en/pages/real-estate/articles/the-impact-of-social-good-on-real-estate.html
• https://contact.sensorberg.com/news/esg-on-the-wave-of-renovation-towards-sustainability
• https://www.cbre.com/insights/reports/esg-and-real-estate-the-top-10-things-investors-need-to-know#introduction
• https://www.unpri.org/introductory-guides-to-responsible-investment/an-introduction-to-responsible-investment-real-estate/5628.article
• https://www.savills.com.sg/services/sustainability-and-esg-services/green-lease.aspx?utm_medium=social&utm_source=linkedin&utm_content=cta&utm_campaign=230315_sg_esg_rsvp_mar2023

Aurex Group can help

If you are a company considering hiring, we welcome the opportunity to present our services and capabilities. If you are a candidate, please check our jobs page or contact us to discuss your background, skills, and future aspirations. We always look forward to staying connected and exchanging ideas, insights, and opinions.

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Jing Leong

Principal Consultant​

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+65 3165 0710

jing@aurexgroup.com

EA 18S9493 | R1872880