Everyone is talking about it, but what does ESG stand for and what does it really mean for the real estate industry? In this blog, we break down the jargon, give an overview of the regulatory environment and outline how data and digital solutions will be vital in the industry’s adoption of ESG, and ultimately help the world become a more sustainable place.
Breaking down the jargon – What is ESG?
Packaged together, ESG refers to the three most influential factors – environmental, social and governance – investors analyse and look to when determining the sustainability of any given investment. ESG factors have been embedded into the investment processes in equities and fixed income for many years, but now all investments, including real estate, are being assessed through the same lens.
The real estate investment industry’s role when it comes to ESG
Collectively, the E,S and G are of great importance to the real estate sector. While each bring their own focus and challenges, working in tandem will pave the way for greater results to be achieved across the industry.
Starting with the E, climate change is unquestionably the biggest existential threat to society and the planet today. The real estate industry and the built environment moreover, have one of the largest carbon footprints of any sector globally and are responsible for around 40% of all CO2 emissions. Therefore, it is clear to see how critical a role it has to play in the world’s pathway to net zero by 2050.
In tackling climate change, there are essentially three areas that real estate companies and investors alike need to address to reduce its carbon footprint – their own corporate emissions, how sustainable are existing assets and the sustainability credentials of any new developments.
This ambitious task will only be achievable if society comes together as a whole to achieve it. That is where the ‘S’ and ‘G’ come in. Therefore, the real estate industry and the investors behind it must work in tandem to make the world more sustainable via diligent governance of real estate companies and their activities.
The impact of ESG on investment decisions
Beyond it simply being the right thing to do, ESG has a fundamental impact on investment decisions into the real estate industry as a result of global environmental goals and sustainability regulations.
The regulatory landscape therefore, means that environmental and sustainability related risks must be documented more comprehensively than ever before and real estate companies will be having to manage far greater amounts of data.
Beyond regulation, ESG factors have and will continue to impact on the value of assets as buildings that do not have robust sustainable characteristics or are not taxonomy-compliant could become less tradable. This development will likely be further amplified as ESG criteria and regulation becomes even more embedded, and therefore, ESG could become one of the most significant determinants in real estate valuations moving forward.
So, the challenge is clear, and the solution is all about data!
How digitisation can help with ESG compliance
To adhere to the new regulations and be prepared for future iterations, climate and environmental risks will need to be more stringently and comprehensively documented and continuously analysed. Information such as sustainability risk assessments, environmental reports, certifications, and appraisals will all be required for investors as well as due diligence. To ensure that this data creates meaningful ESG reporting it must be reliable and comparable.
Alongside the reliability and uniformity, all of this data and information must be stored in a structured database. Therefore, there is a true need for a centralised and reliable database that ensures all relevant ESG information can be accessed at any time and from anywhere. That is exactly what the Drooms data room offers: a “single source of truth”.
A complete database helps identify benefits and weaknesses regarding ESG guidelines and enables the creation of meaningful reports. The Drooms Findings Manager supports to discover such relevant information and thus provides the basis for reporting’s. Additionally, Drooms’ Index Allocation feature allows users to build a data room structure quickly and easily, while the Notes & Highlights functions help flag specific text sections, for example, risks related to ESG compliance.
Drooms digital solutions enable ESG compliance during the holding and selling phase of assets, helping companies prevent non-compliance and ensure transparency throughout the lifecycle of an investment making it the perfect home for navigating the ESG landscape.
ESG is obviously here to stay, and it became clear, that digitisation is the key to the professional implementation of ESG guidelines. With greater digitised data, comes greater transparency. The time is now for the real estate industry to fully embrace the digital, green age in order to effectively perform its pivotal role in delivering a more sustainable world.