Tony Liou

In the past year, ESG (Environmental, Social, and Governance) investing has gone from a niche strategy to a mainstream approach utilized by more institutional real estate investors. Companies like BlackRock and PGIM are scaling their ESG efforts, and more investors and fund managers now know that ESG policies will have a profound impact on their ability to raise funds as well as have a positive impacts on the bottom line.

Investors often focus primarily on the environmental aspects of ESG strategies because making properties more energy efficient and sustainable tends to yield direct financial returns. But what exactly goes into the E of ESG and how does a company achieve them?

As the president of a sustainability consulting firm, I often see clients with a general goal of reducing energy use, waste, and carbon emissions. But they don’t know exactly how to identify, measure, or reach their green goals in an accretive fashion. This is where an experienced sustainability consultant can help guide clients through the process and methodology.

The first step is establishing the right goals. It helps if the asset managers have general ideas of where they want to improve the properties, and a sustainability consultant can help identify common key areas of concern. But to solidify the goals, it’s necessary to analyze the property features and possible risks, which will help identify the actual property KPIs.

Once the goals are established, then it’s time for more thorough analyses and recommendations, some of which are performed on-site. These may include: benchmarking studies that compare one property’s energy and water use to similar properties and show areas for increased efficiency; energy and water audits that identify ways to reduce consumption and quantify their financial payback; resiliency studies that identify climate change threats and identify mitigation measures; and/or a greenhouse gas emission inventory. These assessments show how properties function, where they’re already performing well (and getting credit for those), and where there is room for improvement.

Often, clients only consider these assessments or ESG goals for their existing properties. But it’s important to remember that these should all be done during due diligence as well. It’s a more seamless process during due diligence when properties are already being assessed and data is being collected.

The penultimate step in the process is the actual project implementation, which may include adopting energy efficiency measures, equipment upgrades, buying renewable credits, commissioning or re-commissioning to make sure all building systems are optimized, calculating existing equipment’s end of useful life, etc. This step could also include obtaining green certifications, such as GreenPoint Rated, LEED, or one of the many other certifications depending on the property type and KPIs.

During the implementation process, it’s vital that asset managers consider real estate resilience to climate change. Although not yet considered a standard requirement for real estate, more investors are becoming aware of its importance. It makes sense for managers to understand climate risks and act preemptively, so that a small capital difference can save expensive equipment down the line from potential fires, floods, or other climate-related hazards.

The final step is performance tracking and continuous analysis post implementation, as well as reporting on what has been accomplished to the stakeholders.

As we enter 2021, ESG will only become more essential and ingrained within the commercial real estate industry. Now more than ever, it is critical that property owners and real estate investors understand the importance of  ESG portfolio management services.