ESG is an acronym that is used for ‘Environmental, Social, and Governance’ and is increasingly becoming a significant topic of discussion for businesses. As experienced by the world, several severe weather-related concerns force organisations to monitor property vulnerability and provide strength to manage the risks involved and diminish the effects of climate change. The social responsibility of any organisation draws attention to people. When governed in the right manner, management has the liberty to implement its policies and goals for its ESG program. This is one of the reasons why real estate organisations have increased responsibilities for climate risk due diligence and develop initiatives so as to govern ESG policies.
All of this has led investors to factor in the organisation’s ESG policies. It is because the decision-making process of many investors and lenders has changed and is now based on ESG, as they want to ensure that the business is being developed based on sustainable plans to fight the effects of climate change. Making this happen will also reduce costs, attract more tenants, retain talent, monitor and report goals, and create ways to support the community.
If this information excites you, but you still are unclear about ESG, don't fret! This blog will help you cover what exactly ESG is and how it influences investors’ decision-making processes within the real estate sector.
What is ESG?
Environmental, Social, and Governance are the nonfinancial factors that investors and lenders use to check an organisation’s sustainability. In layman’s terms, environmental factors consider how an organisation safeguards the environment; social factors represent how relationships among employees, suppliers, and customers are managed and operated. Last, the governance factor is based on how an organisation deals with leadership, audits internal control, and shareholder rights. Let’s understand the concept a little better-
The environmental aspect of ESG personifies the responsibilities covered by management for assigning each property’s vulnerabilities and durability concerning climate change and researching the environmental impact of operating its properties. When management reviews the building portfolio, it is the role of management to check where the building is lacking and its resistance to natural calamities. It is a way of safeguarding the environment and community.
Management can also keep track of the environment related to property development. Like the amount of energy used, what is the expected water contamination, how much waste is generated, which recycling initiative has been implemented on a project, etc. It ensures that the organisation is proactively working towards eliminating risk, assuring the right protocols, and saving money. Businesses are currently developing ESG plans by performing property vulnerability and resilience assessments and tracking physical risk.
The social aspect under ESG policies ensures trust, attracts talents, retains employees, and secures expensive mishaps while meeting the needs of the people. Employees are now demanding ESG services to experience better working conditions. In the case of the real estate sector, tenants are considering organisations that are based on ESG initiatives as they require high-performing rent spaces from socially responsible organisations. It is the reason why many organisations have taken ESG policies to promote progress in sustainability efforts and are also seeking feedback from tenants. The basic desire of any tenant is to have affordable and accessible space with quality access to amenities from the property. It is advisable for management to comprehend the opinion of tenants to attract retention and gain profit from it. With the help of ESG, the stakeholders are getting approvals and licences easily, which is helping in expanding the existing market.
The governance aspect under ESG ensures that the organisation uses accurate and transparent accounting criteria. In order to avoid conflict of interest, many investors require assurance. In addition, proptech-based organisations are determined if environmental opportunities prevail and qualify standardised resource consumption to maintain secure and valuable real estate.
ESG and Real Estate
ESG is gaining quite the attention of the investors; it is because ESG is currently shaping and influencing the real estate industry. Since awareness is currently prevailing in the real estate sector, it can create a social impact by attributing the value of existing real estate, affordable accommodation, social housing, and care centres. Or can also focus on environmental investment in the form of green buildings.
Infrastructure is a part of ESG which means there will be the construction of more sustainable buildings that will include eco-friendly materials, modern technology, heating, and ventilation. Doing this part will not only boost the return on investment but also improve investment performance, which is why the government is taking several initiatives to improve the carbon footprint of the cities and emissions reduction.
Not only developed but many underdeveloped countries are talked into implementing efficient ESG-based infrastructure systems. It will provide access to basic resources like water and electricity to people. However, community opposition is observed in some urban areas where there is a lack of ESG consideration, which is costing delays and changes in the projects.
When we talk about India, the country is said to have huge development potential. Also, the country holds huge opportunities for real estate projects that sustain ESG values. The Union Budget 2022 can be considered a shred of evidence that the country is en route to creating a sustainable built environment.