Sunil Rohokale Managing Director & CEO ASK Group “Companies need to think about how they can use the forces of ESG to capitalise on the rising preferences from investors and buyers and create value for various stakeholders, both internal and external.” — Sunil Rohokale The concept of Environment, Social and Governance (ESG) is gaining prominence in the country and has become an important parameter for measuring non-financial performance. ESG is becoming more and more well-liked in business and is increasingly becoming a new screening criterion for business engagement. Investors today who practise responsible investing are looking for businesses with a sustainable foundation. They long to comprehend the several elements that support the longevity and stability of the businesses they invest in. Businesses that can withstand the worst effects of any crisis and consistently factor in the environment, society, and governance are in higher demand. Hence, if the company is good at ESG performance, it has a high probability to attract conscious and responsible investors. Real estate is a sector where ESG is especially underlooked and requires greater attention to make a sustainable investment that holds financial and non-financial value. Private equity firms and their investors are increasingly factoring ESG considerations into their investment decisions and portfolio management strategies. Such measures are being entrenched in all stages of the deal cycle from deal evaluation and finalisation, project management and post-investment and deployment monitoring of assets. As per the International Finance Corporation report, India has an economy-wide 2030 emissions intensity target of 33-35 per cent below 2005 levels. A country's ability to meet its emission targets may be aided by the adoption of ESG initiatives across a variety of sectors including real estate. As per a GRI report, there has been a tremendous rise in capital allocation towards responsible investment. In 2020, 38 per cent of the global investment flows have been towards ESG commitment. PwC’s Responsible Investment Survey, conducted in 2019, indicated that higher than three-fourths of the Global LPs have made a public commitment to include ESG considerations when investing. Another survey by PwC Luxembourg indicated that over 85 per cent of institutional investors, specifically insurance companies prefer to make future investments in ESG-compliant products. With the growing importance of ESG across the sectors, the real estate stakeholders are placing more emphasis on sustainability to enhance the value proposition and strong positioning in the market by achieving better ESG scores to create value for the environment and society at large. Historical patterns indicate that a company with solid ESG practices has the potential to generate high risk-adjusted returns as a result of decreased capital costs and enhanced operational performance. It was also evident from various research reports that companies that exhibit strong ESG performance are more resilient, better managed and delivered better financial performance. Value creation for investors and buyers in real estate It is being understood that real estate can have far-reaching implications for society. By investing in ecologically conscious, green structures such as ESG-compliant structures, green buildings, and LEED or Gold Certified buildings, India's real estate sector may achieve better penetration in the international market and attract more offshore investments. In contrast to the time before the pandemic, the prevalence of ESG norms is now more ubiquitous even in the domestic market. In general, people like to be inside buildings that are clean, well-lit, and have sufficient ventilation. Developers have understood the preference of the buyer and have begun adding these additional features in their developments. The use of renewable energy sources, solar panels for electricity, inclusion of new technology for reducing energy consumption, implementation of waste diversion structures, and the reduction of water usage through efficiencies and conservation are all significantly impacting the environment and making a substantial difference. On the other hand, investors have also shown preferences for such offerings and cost reduction measures. Offering environmentally favourable amenities to buyers, such as rooftop solar panels, heat pumps, electric vehicle charging points, LED lighting, insulation, and smart-home technology is appealing to both consumers and investors since it has cost implications such as saving on energy bills, lower tax breaks, reduced water usage, renewable solar energy, and more. In addition, there is a rising interest in net zero energy (NZE) buildings and several countries are increasingly adopting this concept. The objective is to operate with a lower carbon emission and non-renewable energy contribution to the atmosphere than equivalent non-NZE structures. S&P Global's study on governance aspects demonstrates that organisations that score significantly below average on strong governance characteristics are especially susceptible to mismanagement and risk their capacity to benefit from future business prospects. This demonstrates that effective governance is vital for the success of ESG initiatives. Encouraging the inclusion of ESG practices Historical patterns indicate that a company with solid ESG practices has the potential to generate high risk-adjusted returns because of decreased capital costs and enhanced operational performance. University of Oxford report ‘From Stockholders and Stakeholders’ based on more than 200 academic studies shows encouraging results and many instances of performance improvement due to ESG practice. One of the fast-growing and preferred investment options in India today is real estate and given the current state of the market, it is incumbent upon the industry to introduce various initiatives toward sustainability. The necessity for green real estate has made sustainability the buzzword in the current scenario, leading to revolutionary changes in the sector. The pattern is already apparent, but it needs to be speeded up in light of its growing contribution to the GDP and economic growth of the nation. Green building rules and incentives enacted by the Central and state governments, as well as the increasing interest of investors in sustainable developments, are expected to stimulate the growth of ESG investing and ESG-rated developments. Three major value creation for the real estate firms Top-line growth: Developing a product, which is more sustainable and appealing to consumers leads to additional revenue growth and better demand for the product. ESG-compliant products may increase larger interest from FII and other investor categories. Cost reduction: Using eco-friendly and sustainable materials in their construction will minimise the cost of utilities such as water and electricity. Utilising these methods will aid in the development of water-scarce regions. Brand value and rating: Incorporating ESG standards into an organisation can boost brand value, customer trust, and market positioning. Shifts seen and challenges ahead Implementing RERA, and project approvals only with solid waste management and sewage treatment plants are some of the measures made toward ESG and sustainable development in real estate. Furthermore, the incorporation of vital features such as rainwater harvesting, solar panels on the roof, and a focus on green office buildings and platinum rating buildings is a conscious step toward ESG in the India real estate. However, the sector must address challenges such as holistic ESG planning, implementation issues and participation from all categories of developers. The development of residential green buildings still requires specific government attention and encouragement. Developers should use more prop-tech to create more climate change and energy efficient homes. With this, the goal of sustainable real estate developments can be attained within a few years, and net-zero carbon home planning can be reached. At some point, the ESG score will result in reduced capital costs and commercially viable projects. Way forward In the future years, we will see a transition from green building ratings and CSR activities to a cohesive approach for sustainable development and the adoption of a more sustainable approach through ESG-enabled real estate developments. Hence, the companies need to begin to think about how they can use the forces of ESG to capitalise on the rising preferences from investors and buyers and create value for various stakeholders, both internal and external. From Stockholders and Stakeholders 90 per cent Studies on the cost of capital show that sound sustainability standards lower the cost of capital of companies. 88 per cent Research shows robust sustainability practices demonstrate better operational performance, which ultimately translates into cash flows. 80 per cent Studies show that stock price performance of companies is positively influenced by good sustainability practices. About the author Sunil Rohokale, Managing Director and CEO, ASK Group, spearheads the strategy, planning and new initiatives for the group. He joined as an Executive Director in 2008 and was elevated to the position of Managing Director and CEO of ASK Group in 2011.