Real estate sustainability is vital in the transformation of sustainability, with ESG principles reshaping the industry. With commercial real estate accounting for around 40% of global emissions, property owners have to comply with the new ESG regulations to stay competitive.
Current trends shaping real estate ESG
There is a rising emphasis on ESG and real estate sustainability in commercial real estate (CRE) capital markets. For instance, funds allocated to impact investments surged from $2.6 billion in 2019 to nearly $34 billion in 2022, with North America leading the charge. By 2024, ESG-mandated assets are projected to make up half of all professionally managed global assets, emphasizing the growing role of sustainable investments.
In 2023, ESG-focused funds outperformed traditional investments, achieving median returns of 12.6%. Furthermore, 70 of the top 100 REITs by equity market cap have set environmental sustainability goals, with over 80% reporting ownership of green-certified buildings.
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Opportunities in ESG for real estate investors
Investing in ESG can deliver substantial financial returns while enhancing sustainability.
Cheaper financing options
Real estate ESG initiatives have enabled cheaper financing with ESG tools, which can reduce real estate sustainability projects. The Inflation Reduction Act (IRA) has allocated $20 billion to green banks to support emission reductions.
Incentives
The IRA provides tax credits such as the Investment Tax Credit (ITC), now capped at 70% of project costs, incentivizing clean energy generation. These credits, along with others like the Commercial Building Energy-Efficiency Deduction (179D), offer significant financial support.
Reducing operating costs
Sustainable retrofits can cut energy use by up to 79%, while improved resilience to natural disasters lowers insurance costs, which rose 32% in 2023 alone. Each dollar invested in sustainable practices can yield $4 in savings, highlighting the profitability of green investments.
Green premium
Unfortunately, there is a premium that comes with green and sustainable real estate, upwards of 15%. Metropolis cities such as London can face even higher premiums.
Green financing and certification: A win for investors
Certain places and states, such as California, have decided to promote real estate ESG through innovative finance methods. These financing models often offer competitive fixed rates with longer-term repayment options, which offers investors and owners an attractive option to get involved with real estate sustainability.
Building certification also provides substantial benefits. For example, WELL-certified buildings report higher employee satisfaction and may qualify for government incentives. Certified projects often receive recognition in legislative frameworks, further driving financial returns.
Nowadays, investors and property owners are able to use ESG reporting software tools to keep up with real estate ESG regulations, such as Klimado.
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This article is referenced from ESG In Commercial Real Estate: Trends And Opportunities by Forbes
Editor’s Note: The opinions expressed here by the authors are their own, not those of impakter.com — Cover Photo Credit: Ahya Agawis
