Sujatha Ganapathy Vice President, Sustainability and Wellness Standard Business Knight Frank India “REITs and publicly traded real estate companies are institutionalising ESG within their corporate strategy, business management, and operations. REIT with ESG disclosure has higher credit ratings.” — Sujatha Ganapathy Environmental, Social and Governance (ESG) has gained importance in the recent past. There has been a lot of emphasis on environmental aspects as the effects are known to the real estate industry and 50 per cent of the annual CO2 emissions are generated by the built environment. Green real estate has moved up the corporate priority list. The importance of ESG in commercial real estate is undeniable. Green buildings have larger green lung spaces, renewable energy sources and energy-efficient equipment installed. However, the Social and Governance effects also impact the real estate sector. To a large extent, governance includes being compliant with governance rules and guidelines ensuring that the organisation promotes transparent disclosure of governance guidelines. This will also help in creating a long-term impact. Social has gained prominence after the COVID-19 pandemic. The Social aspects of commercial real estate are workplace safety and security, fair labour practices, and assuring human rights. ESG has become a vital strategy for real estate companies to create sustainable and responsible businesses while meeting the demands of investors, tenants, and employees. According to PwC’s Emerging Trends in Real Estate 2022 report, 82 per cent consider ESG when deciding on investments and operational initiatives. Risk management and tenant-investor requirements are among the driving factors. Buildings that fail to live up to higher environmental standards will be evaluated as less valuable. REITs and publicly traded real estate companies are institutionalising ESG within their corporate strategy, business management, and operations. REIT with ESG disclosure has higher credit ratings. ESG ratings for REITs are monitored and benchmarked by ESG rating companies relative to their peers. There exists a difference between ESG disclosure and ESG performance data for REIT. ESG disclosure data evaluate what aspects and how effectively ESG data is disclosed by REITs and the ESG performance data assesses REIT ESG policies and activities based on performance indicators. The performance data is more easily measurable as energy efficiency and green building concepts for environmental performance. The biggest shift in the real estate sector is moving away from being in a prime location with extensive views from the top floors, to championing net-zero carbon, promoting health and wellbeing, and being resilient to climate change. Climate change has been addressed by investments in green building certifications such as LEED, IGBC, and GRIHA for the last two decades. However, there limited attention has been paid to how a company’s ESG performance affects its employees. The well-being aspects of ESG tend to focus on incidents related to injury, infirmities, and disease. This is insufficient to capture the impact of wellness programmes on an organisation. Well-being in organisations has moved beyond gyms and spas, it is no longer nice-to-have but now a necessity. COVID-19 has also been a catalyst in this transformation. There are a number of effects on human well-being, one of the main aspects being hazardous air quality. Workspaces also contribute to well-being through design and operation strategies. One of the most widely used certifications for physical workspace and occupants of the built environment is the WELL Building Standard. This is a performance-based system for measuring, certifying, and monitoring features of a built environment that affect human health and wellbeing. It is vital for companies to adopt a strong wellness strategy which will blend across the three pillars of ESG to bridge work design, workforce, and workspace. This would help to focus on performance-driven approaches to track and validate the investments. A study conducted by MSCI offers insights into the relationship between ESG performance and workforce sentiment. ESG performance’s impact on workforce sentiment can be a source of competitive advantage. The study found that top employers by employee satisfaction and attractiveness to talent have significantly higher ESG scores than their peers. This can help companies both improve employee satisfaction and attract prospective employees. ESG performance will become increasingly important to attract and retain talent as millennials and Gen Z place greater importance on the environmental and social concerns than their predecessors and will expect more from employers on these issues. Long-term value is created for companies when companies align their goals with society’s goals. ESG issues arise when companies neglect their impact on these other stakeholders. As people in a society increasingly demand greater social responsibility from businesses they work for, buy from, and invest in, ignoring ESG issues would mean exposure to significant risks that affect the top-lines and bottom-lines. About the author Sujatha Ganapathy, Vice President, Sustainability and Wellness Standard Business, Knight Frank, India, has over 25 years of experience in CRE, Administration and Energy Management including managing operations and maintenance of all infrastructure equipment (critical and non-critical) and project management.