Every commercial real estate (CRE) player in touch with reality has a well-thought-out environmental, social and governance (ESG) strategy. In the past, such an initiative was nothing more than a public relations stunt, but the bar is higher now.
Third-party certifications exist to verify whether a CRE business complies with stringent standards set by reputable entities, including the International Organization for Standardization and the Alliance for Water Stewardship. As an investor, you must pay attention to ESG certification to identify safe and risky assets, make informed decisions, and generate handsome returns while maximizing your capital for a better society.
An Advertisement of Value
Excellent ESG ratings translate to high financial values because tenants and fellow investors put a premium on environmentally sound, socially conscious, and competently led CRE assets. For instance, commercial properties with sustainable building credentials — which are interchangeable with ESG certifications — command higher value, have lower operating costs and fetch generous offers at resale.
Scarcity lends prestige to green buildings. Unlike most multi-family residences, offices, hotels, malls, warehouses, hospitals and academic facilities, credentialed commercial properties are circular, energy- and water-efficient, and low maintenance. Their owners and managers get to charge more money for the long-term value they bring to the table. The green building certifications under their belt mean you don’t have to take their sustainability claims at face value. Impartial third parties have already looked under the hood and approved of what they found.
Does this mean you should avoid CRE assets with ESG ratings? Not necessarily.
Use this information to identify brown properties — structures with poor environmental performance — like you’re a residential real estate investor scouring the market for fixer-uppers. Pouring capital into these discounted assets to improve their sustainability credentials can result in considerable yields.
An Indication of Resilience
ESG certifications for CRE usually focus on climate resilience. They look for critical building features to withstand global warming’s adverse effects, and keep occupants safe and healthy.
Admittedly, checking an asset’s ESG credentials to determine its resilience to climate change can be tricky. Certifying bodies know what they want to see, but most policymakers are still deliberating on unlocking climate solutions and transforming domestic construction industries. Building codes have remained a widely underutilized climate policy tool.
Most building codes will eventually become climate-ready. Some certified green buildings may take a hit and seem less sustainable when governments roll out modernized standards, putting them at risk of state intervention. Experienced investors know too well getting on the bad side of regulators can be expensive. Government action usually affects one-third of corporate profits and can be much higher in industries reliant on subsidies.
Luckily, property owners and managers who attain high ESG ratings are almost always adaptive. CRE players that care about ESG spend resources to meet relevant standards because they want to adapt to the times.
Plus, ESG certifications are subject to revisions. They constantly evolve, so it’s important to track fickle climate action goals and pledges to anticipate potential shifts.
A Seal of Ethical Practices
ESG certifications respect traditional corporate virtues like hard work and champion modern values like equity, diversity, and inclusion. Socially responsible CRE players seek high ESG ratings to tell the world they don’t tolerate discrimination. There’s more to good governance than remedying social injustices, but it speaks volumes about a company’s core values and culture.
A CRE Investing Guide
ESG certifications reflect what the world values. Let them guide your decision-making when comparing CRE assets to calculate risks and build a profitable portfolio.
