By Mark McDonald
The Securities and Exchange Commission is still percolating on how companies must report ESG data.
But savvy CRE leaders aren’t waiting to be told what to do. They’re getting ready now by collecting facility related ESG data to avoid the mad rush that’s inevitably coming.
ESG (environmental, social and corporate governance) strategy can greatly affect a company's real estate operations. While these three issues are impossible to untangle from one another, the “E” is especially significant for the commercial real estate sector.
“Commercial real estate owners, occupiers and businesses will likely need to develop plans to decarbonize portfolios quickly, and at scale,” CBRE says in a recently published
carbon-reduction guide.
Environmental factors can and will impact business practices, finances and reputation. ESG data capture is essential for any company with investors, customers, employees, and regulators in the United States who prioritize sustainable and responsible business practices.
Five key areas will bear the brunt of decarbonization efforts.
- Environmental impact:
Energy efficiency:
The commercial real estate industry is under pressure to reduce their carbon emissions. After all, buildings are responsible for 37% of global carbon emissions and 34% of energy demand worldwide, according to the UN’s
2022 Global Status report for Buildings and Construction.
Using energy-efficient technologies like smart building systems, renewable energy, and efficient HVAC can lower environmental impact and operational costs. That’s a win for businesses and the environment.
Green building certifications and amenities
Many real estate teams are seeking green building certifications to demonstrate their commitment to sustainability. LEED (Leadership in Energy and Environmental Design) certification is a prominent choice.
There’s also a significant focus on green amenities like electric vehicle (EV) charging stations, smart-building technology, composting stations, recycling programs and community gardens,
writes ButterflyMX, a security service provider focused on multi-family communities. These features are crowd-pleasers that also achieve a positive, measurable environmental impact.
Such enhancements can increase property value, attract tenants and improve the corporate image. Your marketing team says, “thank you in advance.”
Sustainable site selection:
Companies are now considering the environmental impact of their office locations. This includes proximity to public transport, walkability and access to parks.
“The location of a building is as important as how it is built. Its connection and linkage to the local bioregion, watershed, and community will help determine how a project can contribute to a sustainable environment,”
wrote the U.S. Green Building Council (USGBC) all the way back in 2014. Now, nearly ten years later, enterprise organizations are catching up.
- Social impact:
Employee well-being:
As recruiting and retention woes reach a crescendo after the COVID work from home era, ESG can be a powerful tool in employers’ and tenants’ pockets.
The location and design of corporate real estate have been proven to impact employee well-being and productivity, reports
Corporate Wellness Magazine. Offices that prioritize natural light, indoor air quality, and comfortable workspaces can improve employee satisfaction and engagement.
“Employees and jobseekers want to feel an affinity with their employer,” reports
Forbes Magazine, “with nine in ten people surveyed by Tiger Recruitment agreeing they couldn’t work for an organization that didn’t share their values.
The research goes further, revealing that around half of U.S. employees would consider quitting if they disagreed with their company’s values, especially around issues such as the environment and social equality.
Community engagement:
Corporations with real estate holdings often engage with local communities. Contributing positively to the local environment, economy, and community infrastructure can enhance a company's social reputation and relationships.
“A sustainable project serves more than the immediate function of the building.” Continued the USGBC, “It must also meet the needs of the local community, support active street life, promote healthy lifestyles, provide ecosystem services, and create a sense of place.”
Investor interest:
“In a survey of senior executives, 97% said that external stakeholders have the most influence on a company’s ESG reporting and disclosure policy,” reports
Deloitte.
“These stakeholders understand this work is much bigger than a simple tick-the-box exercise. Because it’s about business fundamentals. It’s about risk and opportunity. It’s about strategy and company performance and unlocking future value. And investors want to know how you’re taking action.”
ESG-conscious investors are increasingly looking to allocate their capital to companies that demonstrate responsible and sustainable practices. Corporations that prioritize real estate ESG can attract a wider pool of investors and potentially lower their cost of capital.
- Governance impact:
Transparency and reporting:
Demonstrating transparency in real estate practices, including property management, lease agreements and tenant relationships, aligns with good governance principles.
Proper corporate sustainability reporting related to real estate holdings can build investor and stakeholder trust.
CoStar Real Estate Manager Director of Lease Accounting, Matt Waters, CPA, believes that SEC-mandated ESG reporting will serve as an antidote to the ongoing accountant shortage. “ESG reporting requires the same analytical and critical thinking skills needed for accounting. Businesses need to collect high quality, auditable ESG data with proper controls in place for accuracy and completeness,”
said Waters.
Risk management:
For many lease management and commercial real estate professionals, ESG efforts are not a personal calling. It feels like just another thing that they have to do because outside forces are telling them too.
But proper governance practices in real estate can mitigate potential legal, regulatory, and financial risks. Which is a boon for individual companies and the CRE industry as a whole who want/need to align with local and global regulations. This includes compliance with zoning regulations, building codes, financial reporting, and other legal requirements.
Furthermore, considering the resilience of properties to climate-related events can mitigate the risk of damage or disruption.
Including corporate real estate in a company's ESG reporting demonstrates its commitment to sustainable and responsible business practices. It also enhances transparency and provides stakeholders with information about its environmental, social, and governance performance.
- Financial performance:
Companies that incorporate strong ESG practices can experience improved financial performance over the long term. Energy-efficient buildings tend to have lower operating costs and can command higher rental rates, enhancing overall returns on investment.
McKinsey & Company calls the combination of revenue growth, profitable growth and ESG priorities
“the triple play.” An analysis in Aug. 2023 shows a strong correlation between financial success and the integration of ESG priorities into a company’s growth strategies.
“The message is clear: not only can you do well while doing good—you can do better.”
- Resilience in changing markets:
ESG considerations can contribute to a corporation's flexibility in a rapidly changing business landscape. For instance, properties designed with climate resilience in mind may be better positioned to weather (no pun intended) the impacts of climate change.
And creating a reputation of being responsible stewards of the environment will last long beyond initial requirements.
Execution
Merging ESG reporting and corporate real estate involves a long list of steps but as you can see, they’re steps worth taking.
To measure success, companies will need to:
- Collect relevant data.
- Set targets.
- Establish key performance indicators (KPIs).
Companies will have the option to report ESG metrics in their annual reports, sustainability reports, or dedicated ESG reports. All of which investors, stakeholders, and regulators are increasingly expecting.
Companies can also leverage third-party frameworks and guidelines to ensure standardized and comprehensive ESG reporting that includes corporate real estate considerations. For example, the
Global Reporting Initiative (GRI) or the
Sustainability Accounting Standards Board (SASB).
So, now we know that ESG means environment, social and governance. But it also means better public perception, increased profitability, improved employee retention and hiring, longevity for your organization and a healthier planet for all.
Mark McDonald is President of CoStar Real Estate Manager