Updated: Nov 30, 2021
Over the past 10 years, environmental, social and governance issues has gained in importance of decision-making for asset managers and institutional investors.
The graphic below shows the significant increase in of PRI signatories and asset owners. Their assets owned, or under management, have risen to nearly $130 trillion in recent years.
ESG-managed investments surpassed 30% of all professionally managed investments in 2021. ESG in assets my hit $ 53 trillion by 2025.
This trend seems to be inevitable to continue, as global regulations, such as the EU's Sustainable Finance Disclosure (SFRD), which came into force on March 10, force disclosure regarding the sustainability of financial products and the overarching “do not harm” principle.
ESG: What is it?
This are the basics:
ESG stands for environmental, social and governance and is relevant to the way today's companies work. It's about how a company's business model and how its products and services contribute to sustainable development.
E: environmental criteria involve the impact a company has on the planet
S: social criteria revolve around people and reputation
G: governance criteria is all about how a company is managed
What is ESG investing?
In simple terms, ESG is the consideration of environmental, social and governance factors alongside financial factors in the investment decision-making process.
These factors encompass a wide range of topics that are financially relevant but that are not necessarily part of the financial analysis.
This can include items such as:
· How do companies react to climate change
· How good they are with water management
· How well the workers are treated
(There’s a whole lot more than this, but we’ll get into that with other blogs later)
Real Estate Investment and ESG adoption
ESG investments have expanded over the past twenty years beyond financial assets to real estate as an asset class.
You can see that when the sustainable share of certified space in the top 30 US office markets has risen from about 5% in 2005 to over 42% in 2019.
The founding of GRESB in 2009, which provides standardized data and a benchmark for ESG-driven real estate and infrastructure investments, is another major advance, bringing it to approximately $5 trillion in real assets value in 2020. This clearly reflects the far widespread institutional adoption of the ESG mentality in real estate investments.
The current ESG landscape shows that many of the greatest leaps in technology and transformative technologies in this area have their primary application in the built environment.
This is particularly the case with the IoT, which has grown massively in popularity in recent years.
Therefore, real estate is likely to be one of the asset classes where the disparity between ESG winners and losers will be greatest from both an operational and a financial perspective. Investors and facility managers are now starting to future-proof their portfolios and buildings. This creates a solid basis for above-average performance and stability.
The World Bank is already pointing out that green buildings can achieve up to 23% higher occupancy, 8% higher rental income and 31% higher sales premiums than conventional buildings. This premium will probably only grow because strong regulation and consumer demand represent an existential risk of obsolescence of “brown” assets and portfolios that do not adapt.
Fortunately, the result is not immutable. PropTech and IoT can channel disruptive technologies to make it quick, easy and inexpensive for owners, managers and users to retrofit existing buildings and turn them into sustainable, efficient and healthy assets.
The United Nations’s Sustainable Development Goals
In 2015, the United Nations introduced their 17 Sustainable Development Goals (SDGs) which they describe as a “blueprint to achieve a better and more sustainable future for all”. There are many parallels between these goals and ESG objectives, which is helping to drive improved regulation in this area.
Many governments are using this framework to develop their political policies, and lots of the worlds largest companies acknowledge the SDGs in their corporate reporting and include their CEO’s message.
It’s clear that the SDGs create many opportunities for both investors and companies. They offer an effective way to look at opportunities and risks, and can provide a framework for pursuing sustainable long-term value creation. They also provide the structure needed for companies to integrate sustainability information into their reporting cycles, providing mor information to both investors and shareholders.
You can see an overview of the 17 goals below, and we will takt a closer look at several of them also in the next blogs.
PropTech can be especially effective in many ways when it comes to the SDG number 3 (Good health and well-being), 8 (Decent work and economic growth), 9 (Industry, innovation and infrastructure), 11 (Sustainable cities and communities) and 13 (Climate action).
It can also benefit from and contribute to other SDG goals such as number 5 (Gender equality), 6 (Clean water and sanitation), and 7 (Affordable and clean energy).