Investing in Real Estate with a Conscience: The Importance of ESG Factors

November 22, 2023

As the global consciousness regarding climate change deepens, investing in real estate with environmental, social, and governance (ESG) factors has become increasingly relevant.

During recent years, the real estate industry has evolved to include ESG criteria that put sustainability and ethical considerations at the forefront of decisions that impact communities and the environment. Moreover, thanks to technological advancements, discrepancies and inefficiencies in ESG reporting are no longer an issue as they used to be. Ethical considerations and sustainability have become imperative in making investment decisions that impact communities and the environment.

As such, investors must consider ESG criteria and embrace the change in real estate that prioritises sustainability and social responsibility as key components for a successful investment strategy.

In this blog post, we explore the vital importance of ESG criteria in real estate investment decisions and why investors should always consider these factors.

ESG: A Game Changer in Real Estate Investing

First, the environmental factors in ESG consider the impact of a property on the surrounding environmental ecosystem. Climate change is leading real estate investors to employ ESG criteria in their investment decision-making to reduce the environmental footprint of properties. Low-energy consumption buildings and using renewable energy sources such as solar and wind power are becoming more popular in the real estate sector. New investment opportunities in real estate are also now assessing the resilience of properties to natural disasters such as fires, earthquakes, and floods. Properties are ranked on various environmental criteria, including greenhouse gas emissions, energy and water consumption, and waste management practices.

Second, social factors in ESG criteria evaluate the impact of a property on the community in which it is located. Investors are interested in properties that have a strong relationship with the community and support diversity, inclusion, and equal opportunity. Stakeholder engagement is gaining more weight in ratings as investors aim to invest in companies that positively affect society. Thus, investors must also consider the impact of a property on the health, safety, and well-being of the local community.

Third, corporate governance factors in ESG concern a company's ethical practices. This criterion evaluates the management structure of companies that own and manage properties to determine transparency and accountability. It also considers cybersecurity and data protection practices and human rights violations.

Fourth, real estate investors who focus on ESG criteria tend to have more significant long-term returns than those who do not. Sustainable properties generally outperform their non-sustainable counterparts. Sustainable assets tend to have a better market valuation, lower operating costs, and a higher probability of attracting tenants, providing higher rental yields for investors. Sustainable investments also pose less risk to investors and are more common among institutional investors.

The Role of ESG Reporting and Assessment

Lastly, ESG reporting and assessments are becoming increasingly relevant in the real estate industry, providing detailed information that investors can use to analyse and compare offerings. Specialised ESG rating agencies conduct ESG ratings. These ratings consider the overall ESG performance of a property across all relevant categories, providing a transparency degree that allows investors to compare and rank various properties on ESG criteria.

The Imperative of ESG Integration

To wrap up, integrating ESG criteria has become crucial in real estate investment decisions. This approach of investing in properties that prioritise environmental, social, and governance aspects positively contributes to society and the environment while delivering better returns to investors. Investors should remember that ESG factors must be taken seriously and implemented effectively, as ESG assessment and reporting will continue to gain importance among investors, regulators, and society. Real estate investors can profitably invest in financially sound, sustainable, and ethical assets and, at the same time, contribute to more extensive societal goals.

 

By the team at Navian, Published November 22, 2023

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