Commercial Real Estate
Environmental Social Governance
Increasing awareness of the potential for commercial real estate (CRE) sustainability practices to foster change sparked a surge of ESG commercial real estate strategies. These strategies span from carbon reduction to employee wellness and corporate corruption.
The COVID-19 pandemic placed additional pressure on CRE owners and tenants to improve sanitation, air quality, and health and safety. This was in addition to the social pressure already driving these efforts in many industries. Government and regulatory agencies inspire commercial real estate owners to take legal action. This legal action includes adding clauses to lease agreements that mandate using sustainable materials or transferring ESG-related fees to tenants.
Investors, landlords, and property owners recognize the importance of sustainable practices from a business standpoint because they achieve a higher ROI through decreasing operational costs, tenant retention, and property value improvements. With global warming concerns rising, the focus on ESG in real estate development heightens.
At Keter, we provide waste management and removal services that help CRE owners and tenants meet ESG waste goals. Keter can help your commercial real estate manage waste at your property.
What Is ESG in Commercial Real Estate?
ESG stands for Environmental, Social, and Governance practices.
- Environmental initiatives focus on a business’s environmental impact.
- Social aspects focus on employee and community health and well-being.
- Governance focuses on corporate management practices and policies.
ESG provides a framework for assessing sustainability risks and highlights your opportunities to improve across a wide field of sustainable practices. Despite a lack of universal standards for comprehensively addressing ESG issues, it is still possible to rely on frameworks and overarching fundamentals that can provide guidance.
Commercial real estate ESG holds different implications for property owners and landlords versus tenants. Property owners and landlords must consider addressing ESG from a legal perspective, incorporating verbiage into their agreements with tenants to ensure that whoever is responsible for making changes and maintaining change is clearly outlined.
Tenants are often at the mercy of property owners who enact rules and enforce change in response to investor and government pressures. Tenants must view it from a business operations perspective. Although making sustainable changes may cost tenants significantly initially, it reduces business operating costs over time.
Environmental Risks
Commercial real estate managers and owners’ main concern regarding their environmental impact is waste management and reducing energy and water consumption.
In practice, this entails:
- Increasing ventilation, HVAC, and heat efficiency
- Installing plumbing that reduces water flow
- Creating recycling programs to address paper, plastics, and glass generated
- Changing bulbs to LEDs
- Adding sensors to lower air conditioning, heat, and lighting when not needed
- Collecting water runoff from air conditioning
- Increasing ventilation, HVAC, and heat efficiency
Social Considerations
Social considerations are often more abstract and challenging to measure than environmental impacts. The social dimension includes employee well-being through fair labor practices such as fair wages and avoiding discrimination, with other companies going so far as to ensure adequate green spaces for employee rest areas.
Moreover, social considerations go beyond the building’s immediate four walls to include the value a company brings to its community, such as urban development and the enhancement of local infrastructure. Further out still, it considers the entire supply chain by valuing labor and human rights, such as following child labor laws.
Governance Implications
Governance focuses on a company’s ethics and values, management structure, board DEI, and transparency in reporting practices. Governance is an essential component of ESG for commercial real estate because reputations rely on accurate ESG reporting that reflects ethical business practices.
ESG and Risk Management
Environmental risks: Climate change is the primary risk facing CRE portfolios, as it threatens wildfires, floods, and severe weather that could make properties unsafe and unusable. Property owners might see higher utilities, insurance premiums, maintenance, repair costs, and fines for not meeting standards. In some areas, climate change cascades down to natural resource shortages, causing supply chain disruptions.
Social risks: CRE property owners who don’t aim to improve ESG standards risk their properties being viewed as dangerous or unhealthy and devalued compared to those who operate with social awareness.
Governance risks: Governance often focuses on corporate transparency; damage to reputations, corruption, and lawsuits can all stem from a lack of transparency.
Support for Sustainable CRE
Setting sustainable goals and achieving lasting change is a tall ask for busy CRE property owners and managers. At Keter, we help owners, managers, and tenants create sustainable waste and recycling programs to achieve ESG compliance in their industries.
If you want to improve waste and recycling in your facility, reach out to us, and we’ll show you how easy it is to get started.
Developing a Real Estate
ESG Strategy
The first step to identifying the ESG areas most critical to your CRE portfolio is to start with an assessment. Aquicore recommends two assessments—a materiality assessment and a risk assessment. For the materiality assessment, begin by plotting environmental, social, and governance impacts on an axis of importance to business success (low to high) and priority to stakeholders (low to high).
By assigning values for both, you can identify the most critical issues and prioritize what to tackle first. After identifying your priorities, run a risk assessment to uncover needed areas and build your ESG goals.
Risk assessment questions might include the following:
- How vulnerable is the building to climate change impacts, like flooding, wildfires, or severe weather?
- How much energy does the building consume?
- How well does the building meet the sanitation expectations of tenants and governments?
- How does the company’s presence affect the community?
- What are the company’s values?
- How transparent are your reporting policies?
- How do you support diversity, equity, and inclusion across your board?
Political Pushback
on Commercial ESG
Sustainability practices appear to most as a universal good; however, not everyone supports using ESG strategies and risk assessments in investing. Some complaints find using philosophical principles to assess economic effects questionable. In contrast, others are concerned about the demise of the fossil fuel industry and its potential cascading economic effects.
Despite politics creating a roadblock for universal standardizations and regulations, certifications remain a guiding light for companies. ESG will continue to increase in importance for the CRE industry.
Commercial Industry Standards and Green Building Certifications
Many programs and organizations release frameworks or green building certifications that support the collection of ESG metrics and guide easy monitoring and evaluation of the state of your ESG programming.
LEED: Leadership in Energy and Environmental Design
Originating from the U.S. Green Building Council, LEED is among the most widely used green building rating systems. Leed assigns points to buildings based on sustainability factors like building materials, air quality, and energy consumption. Depending on the number of points earned, a descriptor—Certified, Silver, Gold, and Platinum—is given, among other measures. LEED certification is a sustainability symbol recognized worldwide.
BREEAM: the Building Research Establishment Environmental Assessment Method
Hailed the world’s leading sustainability assessment system for buildings, infrastructure, and master plans, BREEAM offers certification and data-supported feedback across all ESG performance areas.
Energy Star
The U.S. EPA provides Energy Star; its scores are the industry standard for evaluating energy performance. Further, Energy Star offers resources and tools to assist companies with finding cost-effective ways to reduce energy consumption in their facilities.
ESG Tools and Standards
Standards, frameworks, and tools exist to guide the development of your ESG initiatives and help guide you toward sustainable progress.
- GRESB is a global leader in ESG standards for infrastructure and real estate investments. GRESB aims to “collect, validate, score, and independently benchmark ESG data to provide business intelligence, engagement tools, and regulatory reporting solutions for investors, asset managers, and the wider industry.” Scores from GRESB reveal how well a company follows the ESG best practices most relevant to their industry.
- The Sustainability Accounting Standards Board (SASB) is a nonprofit organization that offers the SASB Standards. These standards guide companies to address ESG aspects most pertinent to financial success in their specific industry.
- The Task Force on Climate-related Financial Disclosures (TCFD) was established to address climate-relevant financial reporting. TCFD recommendations support informed financial decision-making and help stakeholders see climate-related risks in the financial system.
- MSCI offers the Climate Value-at-Risk Index and Ratings that provide ESG risk mitigation performance ratings for companies and put that data into a range of tools that investors can use to understand investment opportunities better.
ESG For Commercial Real Estate Is Constantly Evolving
No universal ESG standards exist, and the regulations are continuously changing. It takes hard work, dedication, access to data, and tools to make lasting, sustainable change. Amid evolving regulations and the weight of societal and stakeholder pressure, it’s crucial to recognize that you don't have to face these challenges alone. Keter can help your commercial company meet regulations, achieve ESG compliance, and operate more efficiently.
Waste and Recycling Management for Commercial Real Estate
At Keter, we offer end-to-end waste management and commercial waste removal services that help CRE owners and tenants address sustainable change through data collection, analysis, and reporting. Our proprietary software makes ESG compliance easy, and we enjoy helping your property become more sustainable every step of the way.
Reach out to us to discuss how we can help you reach your ESG goals.