The notion of going green or shifting towards practices that are socially responsible does not equate to monetary loss. In fact, socially responsible real estate investment strategies are now being employed more than ever for several reasons. You can achieve strong investment returns whilst finding sustainable investment opportunities that benefit everyone involved. Why not do better by employees and society at large if you can do so without negatively impacting your bottom line? Enter ESG in real estate investing…
What Is ESG?
ESG stands for environmental, social, and governance. In terms of investing, ESG refers to standards for evaluating stocks in such a way that your portfolio will align with your social responsibility goals. The goal is not just to realize strong returns on investment, but also to find opportunities to invest in projects or properties that will benefit the community in some respect.
To aid in better understanding this type of investing, here is a simple breakdown of the three pillars of ESG:
- Environmental – Climate change, resource depletion, waste and pollution, and deforestation
- Social – Working conditions, local communities, conflict, health and safety, employee relations, and diversity
- Governance – Executive pay, bribery and corruption, political lobbying and donations, board diversity and structure, and tax strategy
Each of the facets works together to create an overall picture of social responsibility. Just look at the lists above: in what ways can you imagine large corporations and investors handling their investments differently with a goal of stewardship? How can smaller investors make choices that reduce harm and honor commitments to the environment and society while espousing overall integrity at the core?
Understanding ESG in Real Estate Investing
Socially responsible real estate investment strategies are those that are built around ESG. Since most real estate investment trusts, also called REITs, are traded in exactly the same way as stocks, so the criteria for ESG investing are very similar to those used by stock investors. It is also important to note that ESG integration can be a significant competitive advantage in today’s far more socially-conscious world.
ESG in real estate investing is of increasing importance to corporations due to demand from both customers and employees who are concerned with the impact their companies have on the world around them, particularly as the demographics shift and environmental and societal impacts make their way to center stage.
ESG looks at the processes and policies under which publicly traded companies operate, as well as the impacts they have on their communities and the environment. Another issue of central concern in ESG investing is the makeup of boards of directors and corporate executives. Is there, for instance, the diversity that represents the full spectrum of the community or of society as a whole?
Considering operational performance as a part of socially responsible real estate investment strategies includes energy and water usage, greenhouse gas emissions, air quality, safety, waste management, and more. These material factors are measurement tools for sustainability in real estate. Companies with intentional and well-planned ESG strategies have data at their disposal and use quantifiable data to measure performance. The data leads the way to action items that will help to prioritize assets for energy studies, capital upgrades, retrofits, green building certifications, etc.
The financial ramifications of committing to ESG in real estate investing, coupled with the increased demand from investors and communities to integrate ESG, serve to develop and solidify ESG strategies. The long-term financial performance has improved in the real estate industry, and several recent studies have linked that long-term improvement to ESG strategy integration.
ESG is an exciting area of real estate investing, and one that is guaranteed to see growth in the coming years. CGI Strategies is committed to positively shaping the future and ensuring both our investing partners and our local communities benefit from these opportunities.