ESG – A Value Driver for Commercial Landscapes in India

Navigating to build sustainability methods make a positive impact on the planet.

ESG integrates environmental, social, and governance issues into how businesses operate internally and on all levels of their supply and value chains. The ESG canvas extends beyond conventional approach like careful resource management, CO2 emission reduction, and climate resilience. It depends on a variety of elements, from equality and inclusion to the social impact of business operations, transparency in corporate governance practises, and diversity on the board.

Attaining an organisation’s ESG goal requires concerted efforts across the enterprise, with real estate being an important, albeit not a singular pillar of the overall strategy. As India is moving towards achieving a net-zero carbon economy by 2070, decarbonisation of real estate assumes critical importance. Globally, the realty sector accounts for nearly 40 per cent of world’s energy consumption, 30 per cent of raw material use, and 33 per cent of the related global greenhouse gas (GHG) emissions.

ESG – A Moral Desideratum or a Sign of Fiscal Probity?

In recent years, there has been a growing importance accorded to tracking and prioritizing ESG factors in commercial real estate — and there are a few key reasons why. Global acknowledgment of climate change and the material risks associated with it have driven up investments in green buildings and clean energy infrastructure. Even the regulators are working towards the enactment of stricter policies and standards.

The world is currently almost 1° Celsius warmer than it has ever been in the past about 200 decades, and as per the prognosis of the Intergovernmental Panel on Climate Change (IPCC), by 2040 it will be 1.5° Celsius warmer. The world would require creative and audacious ideas to enable industrial decarbonisation and get rid of roughly 40% of the global emissions to limit global warming to 1.5° Celsius.

Given its size and population, the risks associated with the climate have multiplied for India. The nation was one of the top 20 countries in the world according to German Watch’s Global Climate Risk Index Rankings 2000-2019; in 2019, it was listed as one of the top 10 nations with the greatest climate risk exposure.

Moreover, commercial real estate firms with advanced ESG strategies can increase asset value, lower their operating costs, and unlock sustainable financing opportunities. After all, an increase in natural catastrophes due to rising temperatures presents significant threats – in terms of physical safety as well as the monetary impact of insurance, maintenance, and repair costs.

Why Commercial Realtors Ought to Adopt ESG?

A swathe of leading landlords were awarded high rankings in the latest global sustainability benchmark assessments in recognition of the concerted push by them to be champions of change in their buildings’ green credentials. Known as the Global Real Estate Sustainability Benchmark (GRESB) — it recognizes the commitment of real estate developers in achieving sustainability of their properties.

Tenants now vastly prefer developments that have a green certification, WELL certification, etc. Internationally developed markets have demonstrated that these buildings have achieved greater rents and selling prices and reduced vacancy rates compared to conventional structures. The recent focus on improving air quality in India has made sustainable and green practises not merely a long-term plan, but also one that is translating into immediate, nearly palpable benefits for occupiers.

Buildings that adhere to ESG standards offer more appealing investment opportunities in terms of asset values and rental rates. These projects exhibit reduced levels of obsolescence and higher levels of tenant satisfaction, opening the door for increased lease renewal rates.

Streamlining Business Activities and Safeguards from Regulatory Processes

The central and state governments are anticipated to enact stringent laws to accomplish the targets. As the country progresses on its journey towards achieving the Net Zero Carbon Emissions goal by 2070, the real estate sector, which creates establishments for the citizens to live, work and entertain themselves, will play a pivotal role in sustainably achieving the same. As a matter of fact, the sector has already taken a huge leap with roughly 44% of all Grade-A office stock currently certified as green buildings and is at the forefront of integrating the best practices from a design, construction and longevity standpoint to contribute to the establishment of a sustainable infrastructure.

Supports Better Financial Growth for Corporates

ESG enhances pecuniary success by preserving a positive public image, which in turn aids the company in long-term talent retention. A McKinsey poll conducted in 2020 found that respondents agreed that ESG promotes shareholder value by enhancing the company’s competitive position in the market and achieving societal standards for ethical corporate behaviour. Consequently, it contributes to top-line growth over time.

The above-mentioned advantages—higher rents, fewer vacant properties, and lower running costs—help real estate investors increase their profits. Additionally, by increasing the personnel pool’s retention, the company can increase revenue in a more efficient manner, enhancing the firm’s profitability.

This argument has been further supported by RICS, which incorporates the assessment of a company’s ESG criteria in its Red Book. The objective is to offer a framework for meeting the demands of ESG reporting in expert valuation guidance. ESG compliance will therefore become more prevalent among real estate stakeholders.

Rising Emphasis on the S & G facet of ESG

The need to retain sustainable development at the centre of any development strategy has been further highlighted by the COVID-19 pandemic. Offices, malls, and other commercial settings will need to go above and beyond and provide the same degree of safety and comfort to entice staff members and customers to leave their homes for extended amounts of time due to the enhanced flexibility and convenience of working from home.

Stakeholders have mostly focused on the “E” aspect over the last ten years, with little attention paid to the “S” and “G” aspects. However, COVID-19 has brought existing inequities into sharper view, prompting action to address them while also highlighting the need to think more carefully about the changes in working practises and employee wellness that are necessary. According to the Berenberg ESG Survey Exploring Investor Sentiment 2021, 47% of all respondents thought that the element “S” was the most crucial, followed by “E” at 35% and “G” at only 18%.

Operating regulations for the real estate sector are anticipated to tighten, as nations work to meet their COP26 commitments. Ergo, in order to protect themselves from potential scrutiny, stakeholders would need to disclose information more accurately and operate more transparently.

Disclaimer: The views expressed in this article are those of the author and do not necessarily reflect the views of ET Edge Insights, its management, or its members

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