ESG is booming. Investors are increasingly paying attention to selected environmental, social and governance (ESG) topics to better manage the risks and opportunities of their real estate investments. In addition to the ESG topics that have normally been viewed as the most material, new ones such as the cyber security of buildings have become relevant.
Around 15 years ago, the world’s largest institutional investors joined a process to develop the Principles for Responsible Investment (PRI), based on the notion that environmental, social and governance (ESG) issues are highly relevant in investment decision-making, as they easily translate into investment risks or opportunities – also in the case of property investments. For example, construction sites with no waste management, or that employ illegal workers, involve ESG risks that investors are not normally happy to hear about. Moreover, during their period of use, certified, energy-efficient buildings are usually preferred by investors, as is the engagement of property maintenance companies that take their corporate responsibility seriously. The same considerations apply, of course, to the tenants of commercial buildings. If this were not the case, the reputation of investors might be at stake.
Of course, one may well ask whether it would not be sufficient, in practice, for investors to pay attention primarily to e.g. the energy efficiency and greenhouse gas emissions of buildings? However, from the investor perspective, there may be many ESG topics that turn out to be material risks, even though energy efficiency and greenhouse gas emissions are undoubtedly among the most material in property investments.
ESG brings opportunities
In addition, ESG risks and opportunities are constantly evolving. Cyber security has been highlighted by investors for some time, across sectors. Now it seems to be gaining momentum in property as well, as it has become almost routine for modern building management to use digital technologies to measure the “health” of buildings. Digital solutions are also playing a crucial role in defining the life span of commercial buildings. So it is relevant to make informed decisions when selecting these.
Although ESG topics are often presented as risks, they may also be viewed as opportunities with high value creation potential. E.g. constructors, maintenance companies and asset managers with good corporate responsibility practices are likely to be preferred by investors. Companies providing innovative, digital cyber-secure solutions for buildings are additional examples. Typically, companies providing these services are the ones that have good business performance too.
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Responsible Investment and Sustainability Services, PhD
KPMG in Finland