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Why ESG to the future of investing

Marina Andrade • 7/25/2022

Issues such as climate change pose a real risk to the asset value of virtually all companies. Therefore, for some time, environmental, social and governance (ESG) issues have gained space in the commercial real estate market, and have come to be seen as a great opportunity.

Five key factors have driven demand for ESG investments. In this article you will know each one of them.

What's behind the interest in ESG

Five main factors have driven demand for ESG investments:

1. Regulatory demands

Currently, 39% of global energy-related carbon emissions originate from construction. This is why many regional standards require buildings to reduce their carbon emissions substantially over the next 20-30 years. Global and national regulatory changes will also take effect over the next decade. The IFRS Foundation announced that a new International Sustainability Standards Board (ISSB) has been created to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investor information needs.

2. Impact of Millennials

As a new generation begins to represent a larger investor base, it is critical that organizations understand what their drivers are – and ESG is near the top of the list. Over the next two to three decades, millennials are expected to inherit more than $30 trillion of wealth from the Baby Boomer generation, and by 2025, millennials will make up three-quarters of the workforce. Known as the values-driven generation, Millennials will be investing their capital in opportunities that not only generate excellent returns, but also contribute to social good and are in line with their personal values.

3. Mitigation of Risks

For CRE, ESG issues have a quantifiable impact on the portfolio of risks and opportunities. A recent PwC survey indicates that over 79% of investors believe that ESG-related risks are an important factor in their investment decision making. Climate change and global sustainability challenges are some of the biggest accelerators for CRE portfolios.

There are two main categories of risk that investors should consider:

  • Physical risks: These include disruptions to operations and supply chains as a result of unplanned changes due to weather and climate and are difficult to predict.
    Transition risks: These include policy and regulatory changes, technological advances, market changes due to supply and demand, and the public's perception of the company's operations, as well as its reputation.
    Understanding the impact of these issues will allow investors to reduce the risks associated with operations and create a more resilient environment.

4. Positive business results
Investors want to see business strategies linked to long-term value creation, and ESG factors can be used to create the best investment approaches that generate returns. Companies engaged with ESG can see cost reductions, regulatory interventions, and increases in employee retention, attraction and productivity.
At the asset level, value creation can be found in managing a building with a carbon footprint and ESG integration for risk mitigation. This can affect net operating income and drive increases in asset value. If a homeowner finally wants to sell a property, he will be more likely to attract investors where ESG is a qualifier.

5. Social force

Investors seek to understand how the CRE industry can improve “social good” and have broad impacts beyond the scope of operations. Specifically, it's important to understand how assets relate to and improve communities that operate beyond a workplace.

Companies must look forward

The global real estate market is experiencing the convergence of ESG, regulatory requirements, occupier needs and increasing market demands, creating the perfect opportunity to create long-term portfolio value and consistent results in terms of environmental and social impact. In this scenario, owners must be prepared for what lies ahead, analyzing, creating and publicizing their actions to meet the ESG agenda.

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