The purpose of ESG criteria is to measure the sustainability level of companies or investments and they are applicable in a range of market sectors, including real estate. Thanks to ESG criteria, property investment risk is not assessed solely from an economic standpoint, but also on the basis of environmental, social and governance impact.
Let’s take a look at the three assessment criteria—environmental, social and governance—in the real estate sector for investors and investments and what they refer to.
Involves environmental sustainability. This criterion assesses the effects of the activity of a company or investment on the environment. It considers climate change, reduction in CO2 emissions, efficient use of natural resources, respect for biodiversity, agrifood security and respect for the natural rhythms of the Earth.
This refers to the social impact on society and workers. This aspect assesses the social impact of an investment. Key among these are the respect for human rights, rejection of any form of discrimination, awareness of working conditions and personal lifestyles and care in creating conditions of wellbeing in physical spaces.
This refers to the system of government in general. This criterion is often associated with sustainability due to the commitment of those who can control the impact on people and property deriving from the real estate investment process. The framework of the rules and strategies that guide a process—both corporate and financial (capital investment)—is the basis of good practices and provides specific results, including decarbonization, the circular economy, inclusiveness and sustainability mobility, among others.
The ESG rating, also known as the sustainability rating, is an important parameter that certifies the nature of an investment, financial security or property.
The ESG rating is determined by agencies specialized in gathering and analyzing data on the basis of indices created to determine KPIs and the ranking used to classify investments.
There are a number of consulting firms that provide for the formulation of projects using ESG criteria from the onset. These include: R2M, Greenwich Sustainability Consulting and Deepki. Assessment parameters often differ depending on the specific situation and one of the open questions for the future is creating standards that adhere to existing norms.
ESG criteria in Real Estate
Currently, the most widely-used certifications in real estate are: GRESB (Global Real Estate Sustainability Benchmark), BREEAM (Building Research Establishment Environmental Assessment Method), LEED (Leadership in Energy and Environmental Design) and GBC (Global Building Council).
According to the “Managing transition risk in real estate: aligning to the Paris Climate Accord” report published by UNEP FI (United Nations Environment Programme Finance Initiative), the real estate sector faces significant transitional risks due to the decarbonization of economies and is responsible for nearly 40% of global carbon dioxide emissions.
This is one of the reasons why ESG criteria are the subject of major study in real estate, especially in Italy due to the extensive stock of old and historic properties. Real estate investors must be concerned both with generating income and providing incentive for the transition toward low carbon dioxide emissions set by the ESG criteria which are continuously being updated.
- Deloitte, The Impact of Social Good on Real Estate
- UNEPFI, 40% of emissions come from real estate; here’s how the sector can decarbonize
- Bank of Italy, Criteri ESG, il nuovo parametro del real estate [ESG Criteria, the new real estate parameter]