ESG in Commercial real estate

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The commercial real estate industry over the years has upgraded greatly. There are new things coming up to make the experience better for not just investors but also renters or tenants. For instance, there is the ESG. The environmental and social governance is used as a framework for assessing how the CRE portfolio manages the opportunities of the shifting market and the nonmarket conditions created. The shift includes changes in the system’s environment, economic, and social systems. All of them have a major impact on the landscape buildings.

Although there is no universal categorization of ESG issues, some can be defined better depending on the company’s characteristics, industry, business model, etc. But if you are unaware of the same, then here are some of the fundamentals.

  • The environmental criteria are responsible for addressing the environmental impact and the company’s stewardship.
  • Social criteria indicate how the company manages the relationship and creates better stakeholder value.
  • Governance is all about the leadership and management, philosophy, policies, practices, internal control, and shareholder rights of the company.

You can go ahead and read the details to know better about ESG in the CRE industry.

Why is ESG a popular program?

In the current times, the demand for prioritizing and tracking ESG factors in the CRE industry has exploded. There are a lot of reasons why the global acceptance of climate change and the associated risks has increased. This has resulted in investment in green buildings and more clean energy infrastructure. Thus, some regulators work to address this problem. The industrial leaders are taking proper steps to see how the policies impact the sectors.

The investors are now making sound business decisions but want more stakeholder engagement and transparency. As a result, ESG has now become a strategic imperative for portfolios. It helps sustain and create long-term value in the ever-changing world. Further, it comes with a promise of better growth and success. But it is important to use the right strategies for using ESG in favor.

What are the benefits?

Organizations that invest and adopt ESG strategies can improve corporate reputation and culture. Besides, it also helps increase intrinsic value, opportunity management, and a lot more. Firms that have sophisticated strategies will be able to reduce operating costs, increase asset value, and use sustainable financing opportunities in the best way. Reporting practices and data collection will also be helpful for ESG efforts. It will make complying with the regional, local, National, and disclosure requirements easier.

Factors that Impact ESG

ESG undoubtedly can be extremely advantageous for investors to benefit from the policies of the government. However, there are some factors you need to keep in mind before you come up with a strategy of your own. Check them out for a better understanding.

1. Environmental issues

In CRE, they have got the most major impact on the portfolio opportunities and the risk. Climate change, for instance, is the major risk faced by the CRE portfolio today. It can make both ESG-related risks and conventional issues worse. Further, there is an increase in natural disasters due to the increase in temperature. This also comes with a great threat in terms of physical safety, along with the monetary impact of maintenance, insurance, and repair costs.

The other type of environmental issue will include natural resource scarcity which can greatly affect the supply chain. Waste and pollution can result in health concerns and can potentially result in regulatory and legal complications. When trying to understand the

Impact of environmental issues on the business or CRE it will be helpful to know about the three major categories they fall into

  • Physical risk

They are a tangible risk. For instance, climate change can physically impact the portfolio assets and the infrastructure surrounding the area. In the case of CRE, a good ESG strategy will address the requirement to reduce the destruction of building operations in case of difficult weather events or long-term shifts in the climate pattern. In order to come up with the right strategy, one needs to take stock of building operations and code, structure, physical site, and system of each asset. This will depend entirely on the risk of earthquake, location, flooding, sea level rise, mudslides, etc.

  • Transition risk

Such types of risks are extremely common due to nonmarket and market shifts, including changing consumer preferences, associated technology, and shift in environmental and climate policy. In this case, the CRE strategy will cover the right way to address the exposure to climate-related transition risks like changes in energy sources, hand energy, a shift in energy cost, and more.

  • Social risk

This risk factor is all about the human side. For instant severe rising temperatures, weather, poor air quality, and natural resource scarcity will result in certain areas suffering greatly. In the case of CRE good ESG strategy will focus more on the operation and development of buildings that are safe for the occupants and the community. To make a good strategy, one needs to take stock of the building safety and material, health course, contamination potential, emergency response plan, community needs, and other essentials to ensure better investment.

2. Social issues

In contrast to environmental factors, social issues can be a lot more difficult to measure. At the asset level, the social dimension of the ESG requires the person to invest in placemaking and exploring the assets that will deliver better value for the communities in which they are located. Thus, it offers a great place of employment. The welfare of the community that provides houses, assets, and materials production sites is linked to the company’s welfare. This can greatly impact the reputation and the bottom line.

Further in kind and financial contribution to the community can result in mitigating ESG-related issues for both the local community and the company. When looking beyond the individual asset category, the social dimension can actually help address the company’s practices around labor management and human rights. It includes those suppliers and partners.

3. Governance issues

In this case, the government has little impact on the individual assets or even the portfolios. Rather it has got more impact on how the businesses are structured, and decisions are made. It will be beneficial if you understand if your company thinks about the questions like the compensation, executive structure, business ethics that describe the company to the best, the company’s representative, and the diverse nature.

A good government practice can greatly impact the ability of the organization to build investor, community, and tenant trust. Besides, the corporate governance structures that adopt the ESG framework are better prepared for sustaining the changing conditions that can negatively impact the operations, including the government fine, stakeholders, oppositions, boycotts, etc.

Creating the right ESG strategy

Given how important ESG has now become in the CRE industry, coming up with your own strategy is important. Remember, there is no uniform approach to determine which ESGs are important to the long-term success of your assets or which will be the most important ones for the stakeholders. However, the right way will be to develop a holistic understanding of the ESG priorities that need to be addressed. It is done by conducting two kinds of assessments. This includes discussing assessment and materiality assessment.

On a basic stage, the materiality assessment will include ranking the importance of economic, environmental, and social impact. One needs to plot out all the issues on an axis of importance to the stakeholders and the business’s success. Establishing which of the quadrant issue falls into will help prioritize the issues and correctly allocate the resources.

Once you have received the idea about the priority, you need to perform a risk assessment that will include the social, physical, and transition risks of the portfolio. This includes everything from the new acquisition, existing asset, and loan origination. Thus, the assessment can be as broad or narrow as required. It will focus on a wide array of ESG considerations or the climate-related threats required. You can deploy an asset or risk management team to perform on-site assessments for high-end assets.

The CRE looking to tackle the E, in particular, must manage the greenhouse gas emission over a long time for committing to the science-based targets. While if you are looking to deepen the impact across the board, aligning existing targets, goals, and programs with sustainable development goals will be a great way to start with the program.

Conclusion

ESG undoubtedly now has become a major part of the CRE industry. Thus, it will be beneficial if you understand things in detail and take proper measures to make use of the available opportunity at hand. If you are facing any difficulty understanding things or if you are in need of financial assistance, you can consider connecting with Private Capital Investors. They have got experienced professionals who will make the process absolutely easy. They will help you understand things better and guarantee you get to implement the right strategies in your companies. Thus, ensuring better growth and success.

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