AS environmental, social and governance (ESG) practices become a topical subject among investors today, it’s not surprising to see more real estate players either acknowledging or embracing its importance.
The relevance of ESG has been magnified further as the real estate industry gears up for business in a post-pandemic world.
Today, one can’t deny the importance of ESG when flipping through the pages of the annual reports of many listed property developers.
In its 2020 annual report, former Sime Darby Property Bhd (SDP) chairman Tan Sri Dr Zeti Akhtar Aziz says ESG performance is on the front burner for the group.
“The importance of ESG has also been elevated in managing the various human-faceted risks arising from the pandemic.
“In addition, our contributions in 2020 included a significant amount to Covid-19 relief efforts to safeguard vulnerable communities.”
Given the sheer size of the group, Maybank Investment Bank (Maybank IB) in a recent report highlighted the importance for a company like SDP to incorporate ESG practices.
“SDP is one of the largest property developers in Malaysia. It has a remaining land bank of 19,977 acres worth RM87bil in gross development value.
“Almost 67% of the remaining developable land bank is located within 24 active townships, integrated and niche developments.
“So many development projects could expose SDP to some ESG risks (bribery and corruption).”
As such, Maybank IB says SDP is at the forefront of the sustainable development of the property industry.
“To ensure better corporate governance, SDP has established several policies to ensure the business conducts are consistently carried out ethically and with integrity.
“Certain policies are applicable to its contractors, subcontractors, consultants and parties performing work or services for or on behalf of SDP.”
Meanwhile, Eco World Development Group Bhd (EcoWorld Malaysia) chairman Tan Sri Liew Kee Sin says ESG practices are weaved into the group’s projects right from conceptualisation, design, construction and up to when the company engages with new residents to promote a positive, sustainable future.
“As the impact of climate change continues to be felt around the world, we are increasingly conscious of the group’s carbon footprint and the importance of monitoring and reducing our greenhouse gas emissions,” he says in EcoWorld Malaysia’s 2021 annual report.
Separately, Mah Sing Group Bhd in its 2020 annual report says the group is committed towards progressively becoming more sustainable with a growing focus on ESG matters.
“These include waste and emissions produced, consumption of natural capitals, human rights and labour standards and other material topics.
“Decisions are made based on consideration for profits, as well as the extent of environmental and social aspects. Compliance with regulations is prioritised.”
Mah Sing adds that the growing consciousness among almost all of its stakeholders on environmental and social performance necessitates that businesses today become focused on a triple bottom line, namely, “people, planet, and profit”.
“Investors, shareholders, employees and regulators want businesses to be forces of good and not just profit-based entities,” it says.
Meanwhile, Deloitte, in its paper “ESG as a value driver for real estate,” says the application of ESG standards on real estate (notably by governments and developers in many developed countries) has shown that this asset class is also relevant when these guiding principles are being applied.
“Awareness is growing that real estate can have a significant social impact either through the form of rehabilitation of public spaces (indirectly attributing value to existing real estate), affordable housing, social housing and care centres, or through an environmental focus investment on new buildings such as green buildings.”
Deloitte says the correlative appetite that investors have for ESG closes the loophole where more (long-term) value is attributed to real estate assets.
“Medium to long-term profit is, therefore, considered and kept with the usual lower risk volatility of a real estate asset. Sustainability has become increasingly vital to real estate investors.
“ESG is, therefore, here to stay and will increasingly shape and influence real estate valuation, and hence real estate investment, as investors wish to allocate their commitments under this banner.”
But aside from fostering eco-friendly buildings, Deloitte says ESG also allows space to include considerations about the impact of properties on the community, covering aspects like diversity.
“The real estate industry must respond to this challenge by creating opportunities through social impact investing, like multi-tenant shared spaces or the transformation of underutilised buildings into enthusiastic venues.
“In practice, the major obstacle is that investors will need to reinvent their traditional investment models to match the needs of the local community.”
Deloitte goes on to highlight that real estate and infrastructure are indeed very closely related.
“For example, the real estate industry is a major consumer of energy.
“Therefore, the construction of more sustainable buildings by means of new eco-friendly materials or smart technological heating or ventilation, not only helps the environment, but also boosts the return of the respective real estate investment, improving investment performance.”
Deloitte says governments around the world are increasingly fostering these new construction methods to improve the carbon print of cities and emissions mitigation.
Another expression of the ESG impact on infrastructure is the so-called “smart cities” initiative, adds Deloitte.
“This refers to urban areas for which different innovative technological methods are designed.
“The output generated by such methods (in the form of data or statistics) can assure that city infrastructure is managed and organised more efficiently.
“Most of these methods are nowadays designed to allow ESG guidelines to span across the life of a city, in the respective assets, community services and resources, including better (and greener) transportation, improved communication networks, optimisation of energy consumption, water supply, crime detection and waste.”
In light of the growing importance of ESG, Moody’s Investors Service recently updated its environmental heat map – a risk assessment of various corporate sectors to reflect evolving ESG standards.
In its analysis of the real estate market, Moody’s says rated real estate investment trusts’ (REITs) exposure to environmental risks was low, as its landlords tend to own diversified portfolios of assets and continually invest in the assets to mitigate event and operational risks.
“Building approvals are subject to strict regulations in most countries, and environmental site diligence is typically required.
“Nevertheless, the REITs’ exposure to physical risk is material, given our expectations of more frequent and severe climate events in certain regions and a steady increase in surface temperatures; and their physical asset-intensive business models.”
Moody’s adds that exposure to carbon regulation is growing as more jurisdictions establish emission and energy-efficiency guidelines.
“A property’s environmental footprint (parameters such as energy efficiency, water usage, waste management and indoor environment quality) could influence leasing outcomes because tenants are becoming more sensitive to the green attributes of their leased spaces.”
In a similar vein, Moody’s says the environmental attributes of real estate assets also have a bearing on investor interest in the REIT and the property.
“REITs with less diversified portfolios in regions that are more exposed to climate change and regulation would be most challenged.
“Landlords would have to invest in their assets to improve resiliency parameters and operational efficiency,” it says.
Following the pandemic, PwC Malta in its paper “ESG and Real Estate: Building green and affordable,” notes that companies with a high level of strategic resilience have an advantage over organisations that have not given any thought to such crisis scenarios before.
“This issue will remain at the forefront for the sector because the challenges arising from a changing climate can lead to new crises for the real estate industry.
“Companies that consider the potential impacts and on finding the fitting solutions to them today, will be at a clear advantage tomorrow,” it says.
Meanwhile, Deloitte says that the pandemic has severely impacted real estate valuations.
“Due to the lockdown, site visits were hampered.
“At the same time, many transactions were put on hold as the pandemic shifted people’s demands for use of real assets, such as an increase in the search for bigger houses with gardens outside the urban areas (due to working from home).
“As much as the pandemic had slowed down economies and the real estate industry’s activities, the positive side of it is the wake-up call for investors to prioritise sustainable investments.”
Deloitte goes on to point out that Covid-19 has brought out the “environmental factor” by enhancing the urgent global need to decrease pollution and improve precarious sanitation systems.
“In fact, the initial slow start of the adoption of ESG standards was probably built on the erroneous perception that focusing on positive social impact would reduce financial return. It is becoming evident that it is indeed the opposite.”
However, Deloitte says that the pandemic has had an even greater impact on social-related factors.
“Covid-19 seems to be reshaping how the community should interact and behave from now on, which also calls for a revaluation of the current transport, technology and health infrastructures.
“This said, more than ever, it is key that Millennial investors, as well as governments, not only focus on traditional financial metrics but also on their ESG performance in order to create a positive long-term impact.”