There is no doubt that environmental, social and governance (ESG) principles play an increasingly influential role in investment management today. For real estate investors in particular, climate change has arrived as a material risk both in terms of physical risk from floods, hurricanes, and wildfires, as well as transitional risk such as compliance, insurance, and tax increases. During 2019 the U.S. was impacted by 14 natural disasters that each resulted in at least $1 billion in damages. Globally, damages are projected to grow to $54 trillion as early as 2040, if we continue along the current path.
The real estate industry has focused on ESG factors to combat the risks and impacts of climate change noted above. There is widespread recognition that a meaningful commitment to ESG can protect and increase a property’s value by decreasing regulatory compliance risk, functional obsolescence, insurance premium increases, reputational risk, and down cycle valuation risk.
While we believe risk mitigation is a critical goal, environmental factors also play a role in enhancing a property’s net operating Income (NOI). Simply stated, the best-run buildings from an ESG perspective will likely have higher occupancy rates, and perhaps even higher rental rates. Such buildings also will have lower operating expenses, as they are focused on reducing energy, water consumption and waste. The result should be higher NOI and higher value.
Reflecting both the risks associated with climate change—and the potential rewards in terms of better property performance and value—the real estate industry is increasingly prioritizing ESG in investment strategy. In response, it is important to set ambitious sustainability goals and take bold action for the betterment of properties, their occupants and the collective wellbeing of society.