Investors emphasize ESG in properties: Climate risk, social & health factors affect a building's future value

Investors are rethinking sustainability in their bids for new properties, with factors like improving resilience, reducing carbon emissions and enhancing employee well-being top of mind, according to a new report from JLL. 

“The role of buildings in creating a more sustainable future is now in the spotlight,” says Lori Mabardi, ESG research director at JLL. “Stakeholder pressure is rising where regulators, occupiers, lenders and investors are expecting more from the built sector.”

Mabardi says more and more owners are assessing the direct impact of climate change on their portfolios early and modelling future risk: “We’ve seen extreme weather grow four-fold in the past four decades in the U.S alone,” she says. “Real estate investors, landlords and occupiers are increasingly understanding that resilience needs to come into the equation.  This could mean taking measures to address areas of weakness in the asset itself, or taking a portfolio view and evaluating exposure to a number of risks like wildfire or drought.”

She notes that countries like the UK, France, Germany and Canada have already established mandatory climate-related financial risk disclosure, which is under consideration here in the US.

Assessing a building’s carbon footprint is also critical: owners that fail to do so “will soon start to fall behind,” according to Emily Chadwick, ESG risk and valuation director at JLL.

“There are dozens of studies indicating a value differential associated with more energy efficient real estate,” she says. “However, decarbonizing an asset takes planning, investment, and time. Waiting to act exposes an asset to the risk of stranding and investors then risk a brown discount.”

She adds that “not all green certifications equate to a long-term low carbon footprint – some are more focused on initial sustainable design than ongoing operations – and taking this into consideration will reset the value conversation.”

Promoting the health of tenants should also be top of mind, JLL experts say, citing Allen and McComber research that shows that in the US alone, the savings from an improved indoor air environment are between $25 billion to $150 billion a year. Effective rents for healthy buildings in the U.S. also command between 4.4% and 7.7% more rent per square foot than their peers that are not WELL or FITWEL certified, according to MIT research.  

 “Changing expectations mean that buildings need to meet new requirements, for people using them or the capital investing in them,” says Guy Grainger, Global Head of Sustainability Services & ESG at JLL. “Whether it’s health & wellbeing, climate risk or social impact, the future value of the building depends on getting these right.”

ESG is expected to play an increasing role in commercial real estate in 2022, according to a trends report issued in October by PwC US and the Urban Land Institute. Around 82% of respondents said they consider ESG elements when making operational or investment decisions, and a growing consensus sees the property sector as bearing much of the responsibility for climate change.