REITs, ESG & Sustainability (2024)

ESG (environmental, social and governance) investing has become prevalent as stock market investors grow more concerned about how a company's sustainability will finally affect its bottom line. Investors are increasingly assessing companies according to specific social, environmental, and corporate governance-related factors, and the emphasis on "responsible investments" is only increasing.

As a result, the real estate industry is also becoming more sustainable, including real estate investment trusts, or REITs. These companies own, operate or invest in income-generating real estate, such as residential real estate, aparthotels, medical facilities and warehouses.

Thus, real estate is a major part of the sustainability challenge – and a major opportunity. Buildings are large consumers of energy and producers of emissions. We spend 90 percent of our time indoors, andthe construction and operations of buildings account for 40% of global energy use, 30% of energy-related GHG emissions, approximately 12% of water use and nearly 40% of waste. There is huge potential to improve the performance of buildings in terms of sustainability issues. Addressing sustainability challenges could affect the market values of a property or portfolio, providing a price premium, a lower default risk, lower volatility and slower rate of depreciation.

Sustainable investing has evolved from a niche to a mainstream market segment as institutional investors are increasingly appreciating the benefits of investing with SDG focus - environmental, social, and governmental aspects in mind. The latest study showed that more than half of institutional investors consider effective management of environmental issues and climate change as critical to the strategic success of their portfolio.

In the context of REITs, there are four main market factors that stimulate the growth and development of ESG.

First driver: Institutional investors recognize the importance of ESG and are primarily concerned with maximizing the risk-return profile of their real estate investments. Businesses have a duty to manage sustainability, and they owe it to their stakeholders to show that they are accountable.

Tenants and occupiers are the second motivator. According to them, energy-efficient, sustainable buildings can lower their operating expenses and environmental impact. Asset managers view green buildings as having the ability to increase rental income by luring in and keeping high-paying tenants. They are linked to greater tenant satisfaction, which over time reduces tenant incentives and re-leasing expenses.

The third driver are the regulators who are enacting more stringent environmental laws at both the macro and micro levels, as well as asset-level new building rules that incorporate sustainability practices like green certification criteria.

The real estate associations are the fourth drivers. These organizations are devoted to the creation of extra-financial reporting standards to inform decision-makers as well as related standards that incorporate the most recent sustainability benchmarks, market trends, and best practices.

REITs should take an all-encompassing approach to ESG that gives each element equal weight. On a more tactical level, we would anticipate that REITs would strengthen their oversight of ESG concerns at the asset and portfolio levels, intensify their efforts to integrate ESG into company culture and operations, and boost public reporting and disclosures on ESG performance. By doing this, they would be able to address the sustainability concerns of today and develop resilience to navigate the ESG issues of the future with foresight.

Sources:

wealthmanagement.com

www.tamimi.com

www.money.usnews.com