The Impact of ESG Real Estate Investment


Green Development

What is ESG?

ESG stands for Environmental, Social, and Governance. It is a set of criteria for evaluating companies' performance used by investors who want to keep their portfolios as socially responsible as possible.

ESG investing is the integration of Environmental, Social and Governance factors into the fundamental investment process. Using ESG factors or an ESG framework, investors can select companies in which to invest. ESG factors such as environmental friendliness are considered factors in the longevity of a company.


What Benefits can Development projects derived from implementing ESG factors


According to one report, solid ESG practices resulted in better operational performance in 88% of companies, the stock price performance of 80% of companies was positively influenced by good sustainability practices and lowered the cost of capital of 90% of companies, and companies with strong sustainability scores showed better operational performance and were less of an investment risk.


Developers, Contractors and related Vendors that incorporate ESG factors into their long-term strategic planning provide a more complete picture of their prospective value. Financial performance is one area that has received the most attention in research on ESG issues. The report analyzed approximately 200 studies to assess how sustainable corporate practices have affected investment returns, and these studies have shown that operational and stock price performance of companies may be positively influenced by good sustainability and ESG practices.


According to PwC research, 65% of investors said that their motive for taking ESG issues into consideration was to help manage investment risks. By reporting on ESG performance improvements, companies send a signal to investors that they can mitigate risks and generate sustainable long-term financial returns.


Recovery for the real estate sector will likely be slow, uneven and erratic. However, there is still significant capital sitting on the sidelines waiting to be deployed, and real estate continues to prove itself a strong, defensive and long-term move.


How will the Real Estate Industry recover in 2021?


Based on industry executives' responses, KPMG reported that only 8% expected the market to recover in 2021 and majority expected within the next 3 years.


This Covid pandemic disruption has accelerated 3 emerging trends:

1. The digitization of work

2. The transformation of physical retail

3. The shift towards ESG considerations


Clearly, each of these trends will manifest differently across locations and sectors, depending on how the pandemic evolves. All signs suggest their impact will be felt by all players across the value chain in the real estate sector.


As for the retail sector, one out of three thinks that it will take more than 5 years before valuation will increase. Unless the landlords are leveraging on technology, innovations and creativity, it will be difficult to attract more foot traffic into retail malls to sustain tenants or rents.


Digitization has been “forced” into many homes due to quarantines and lockdowns in many countries and cities. Many have embraced the convenience and reliability of shopping from home. Ecommerce boomed in 2020. Logistics soared. Zoom, the Video Conferencing App registered the highest number of users during this period. Live-streaming sales took off into the main-stream. Many companies have quickly adapt to remote working policies and environments.


This has impacted on their Social responsibilities. With more SAAS technology in place, transparency has improved, and so has Governance. Overall, companies across the globe is discovering that implementing an ESG policy has impacted their bottom-line and sustainability. Such embrace of ESG is slowly gaining popularity with real estate developers as well.


Of the 3 factors, Environmental factor seems to more popular among investors. The Green factor include financial risks attributable to climate change, the potential enhanced reputational and financial benefits associated with sustainable assets and increasing government support for green assets reflected through fiscal spending and regulations. Prudent private equity investment managers are exploring the application of strategic ESG initiatives in their investments, not only to address requirements from investors and regulators but also to enjoy some of the enhanced returns that are associated with green portfolios.


According to the 2019 PERE ESG investor survey, 70% of institutional real estate investors have explicit ESG policies in place, and nearly all respondents reported that ESG principles have a role in shaping their investment decisions. The PERE Survey reported that 35% of such real estate investors already expect their investment managers to implement ESG initiatives, with a further 13% stating that they would require such initiatives within the next three to five years.


Such expectations will only enhance the importance of the impact on real estate investments in the near future.


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