By now, every real estate business is familiar with the concept of ESG – environmental, social, and governance – which refers to a framework for evaluating and measuring a company’s sustainability and ethical practices to assess its impact on the planet, people, and broader society. Today, many real estate businesses may perceive the implementation of an ESG framework as either a luxury or an unnecessary compliance measure. Few real estate organizations have started to integrate ESG into their operations and even fewer are beginning to receive any independent validation of the information reported.

Common threads for slower adoption can be attributed to current macroeconomic challenges, lack of clarity regarding ESG regulations, and significant costs and time associated with implementation and related reporting. Although it might seem like now is an inopportune time to prioritize ESG, it is important for real estate companies to reassess this mindset to enhance profitability in the longer term and mitigate risk.

Real estate affects everything that we touch and everywhere that we spend all of our lives. As a result, real estate entities – small or big; public or private – have the largest opportunity to influence and help make a positive impact on the environment and society. Developers; multifamily apartment, industrial and commercial property investors; and hotels who have started to embed ESG into their organization’s vision are already seeing positive results. Examples of measurable success include a greater ability to attract higher-quality tenants or make a positive impact on the environment through utility management programs, both of which can lead to increased profitability.

Beyond real estate entities, key stakeholders such as tenants, prospective tenants, suppliers, certain regulators, etc., are increasingly expecting other stakeholders to be aligned with their values and be on the same journey. As a result, there is a growing expectation that organizations they work with will report on their ESG goals and track their progress toward net-zero metrics.

Still, many companies are hesitant to take steps to begin their ESG journeys due to increased costs, inconsistent reporting, and a lack of mandates and standardized frameworks. However, the Securities and Exchange Commission plans to release a final ruling on enhanced climate change disclosures in fall 2023. The SEC also has human capital, another essential component of ESG, on its regulatory agenda for 2023. Additionally, some large frameworks also being adopted in certain industries such as Global Reporting Initiative expect organizations to show what impact their operations have on the planet, people and societies. These current and pending regulatory requirements mean that businesses can no longer afford to wait to begin their ESG journey.

Risk management

Although not currently seen as such by many in the industry, ESG should be viewed in conjunction with a real estate entity’s assessment of risk management. For example, a lack of ESG planning could dampen a seller’s ability to sell their real estate assets to an investor that reports on ESG, potentially resulting in a lower valuation and other complications during the sales process.

While immediate impacts from not taking any action regarding ESG include difficulties like the one mentioned above, the seeds for longer-term effects are also being sown, particularly in connection with the “great generational wealth transfer,” where portfolios of assets are being transferred to the next generation that takes ESG more seriously. Additionally, over time, there may also be a shift where top talent gravitates to those real estate entities with ESG at the core of their values.

Although the specific environmental and societal implications will vary for each real estate company, there already is a strong correlation to the bottom line for those entities that decide to incorporate ESG into their core values. This alone provides an important perspective on why embarking on an ESG journey now is important and can lead to future success.

Getting started

Initiating an ESG journey can be manageable; successful implementation of sustainable ESG plans often involves a gradual start. It all begins with identifying a company’s objectives and the areas of alignment with key areas of ESG. Finding the overlap between profitability and the development of a business ecosystem focused on sustainability will show that ESG does not necessarily need to conflict with business goals.

Once this is determined, an organization can take the following steps:

• Set short-term and long-term goals.
• Craft a specific plan with realistic and achievable steps to accomplish those goals.
• Identify the risks of potentially setting unrealistic objectives.
• Develop a plan for monitoring progress and measuring success.

It’s important to remember that ESG-specific goals serve as milestones and ensure a measurable and accountable pathway toward the establishment of an ESG-oriented culture. The implementation of an ESG plan is an ongoing process of improvement and adaptation, requiring regular assessments and course corrections.

Real estate entities, as well as organizations of different industries and sizes, should begin to prioritize ESG or potentially face certain business and financial risks in the future. It is time real estate entities recognize the potential that developing ESG programs can have on their bottom lines and take meaningful steps toward integrating ESG into their long-term strategy and operations. The time to start the ESG journey is now.

Michael Mastruzzo is real estate practice leader and Mihir Jhaveri is ESG practice leader for Centri Business Consulting.