Factoring ESG into property investment

In recent years, there has been a significant change in the property investment industry towards a more sustainable and responsible approach. This trend is driven by several factors, including the growing awareness of environmental, social and governance (ESG) issues, and the long-term benefits of responsible investment.

ESG has a significant impact on the performance, risk, and value of real estate investments.

According to a report published by Deloitte, ESG can be a value driver for real estate by helping to ensure that buildings are designed and operated in a sustainable and socially responsible way. Hence, ESG investments in real estate properties can translate to lower vacancy rates, lower operating expenses, and higher market value.

In a report by McKinsey & Company in 2022, residential and commercial buildings are responsible for approximately 40% of global carbon dioxide (CO₂) emissions from fuel combustion and 25% of overall greenhouse gas emissions. As the world moves towards reducing carbon, environmental sustainability is one of the pillars of ESG in property investment.

Nowadays, property investors are giving more importance to green practices to minimize the overall environmental impact of real estate development.

According to McKinsey, real estate leaders have accelerated the need for economic and environmental resiliency planning to combat ecological risks. Property investment leaders need to shift how they design, build, operate, and decommission assets with green growth.

Property investments are also contributing to the development of creating inclusive, accessible, and safe spaces.

Investors are ensuring that the property is secure and well-lit, with working smoke detectors, carbon monoxide detectors, alarm systems, and security cameras. They are also accommodating people with disabilities, such as wheelchair ramps, accessible entrances, and elevators; attracting a wider range of market segment.

Furthermore, proper governance in real estate can help investors implement and assess its policies, goals, and reporting efforts for ESG initiatives.

Based on a study published in the open-access journal Sustainability, strong government policies and procedures can help build trust, attract buyers or renters, and prevent costly mishaps while meeting community needs. Policies and regulations have a significant impact on the real estate market, and property investors can take advantage of opportunities and avoid potential risks.

While the world is facing post-pandemic challenges, property owners and investors who consider ESG-driven actions may be better positioned for success in the future.

According to PwC, ESG-focused investment is expected to soar 84% to US$33.9 trillion by 2026.

Furthermore, real estate investments with strong ESG practices have higher returns on invested capital and assets compared to those without, according to a report by investment research firm MSCI ESG Research, Inc.

Buyers and tenants are also increasingly looking for buildings that are designed and operated in a sustainable and socially responsible way.

ESG, in turn, has become an essential consideration for investment decisions. Investors can attract and retain buyers or tenants, increase the value of their investments, and have a positive impact on sustainability. Consequently, those who ignore ESG factors may be at risk of losing out on opportunities.
— Mhicole A. Moral