ESG Adoption: Perception vs Reality

Enterprises today, both public and private, see a lot of dialogue around ESG globally. People are indeed concerned about climate change and its derivative impact. But is all this concern really translating into action? A recent survey report by CBRE revealed the most common and impactful ESG initiatives in their overall real estate ecosystem. More than two-thirds of respondents in the survey said their companies' focus on ESG has intensified in 2022 and that their primary ESG consideration for real estate is to reduce energy consumption and carbon emissions.

As businesses increasingly focus on developing forward-looking strategies that consider climatic, societal, and ethical issues, ESG must evolve to take center stage from a peripheral balance sheet factor to a key driver of investment decision-making.?For the real estate industry, the spotlight is increasingly on developer and occupier strategies to deliver net-zero targets and contribute to the cause of climate change.

Given India’s size and population, our climate risks are also significant. The country is ranked among the top 20 nations globally on the German Watch’s Global Climate Risk Index Rankings and is among the 10 most vulnerable nations ranked on this index, thereby demonstrating growing climate risks.

Environmental features drive building appeal and transactions

As companies face rising energy costs and government regulations, they’re willing to pay a premium for spaces with features like on-site renewable energy generation (58%) or smart technology to monitor and adjust energy use (53%) to help reduce energy consumption and carbon emissions, according to the latest CBRE ESG survey

In fact, 84% of respondents said they specifically look for energy-reducing features - and almost half would either seek a discount or walk away from a deal if a building lacked these.

Another significant ESG influence is green-building certification, such as the Leadership in Energy and Environmental Design (LEED) rating system or several administered by the Green Building Council. Forty-five percent of respondents would pay a premium to lease or buy a certified building, and a third would either seek a discount from or outright reject a building that lacked certification.

The report’s analysis also showed that developers continue to believe that constructing a sustainable building is more efficient than refurbishing existing stock. As a result, India is witnessing a trend wherein Peripheral Business District has the highest share in green buildings, followed by SBD; CBD has the lowest number of green buildings as it is usually a hub of older projects.

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Social features entice companies to pay a premium

Tolerance for long commute times has waned considerably among employees in recent years. 82% of respondents named convenient access to public transportation as the social feature that most affects their interest in a given building because easier commutes are associated with better employee well-being.

Companies also place a higher value on buildings supporting their employees’ mental and physical health. For example, respondents to the survey said buildings that make it easier for employees to ride their bike or walk (66%) and have an inclusive design to meet the needs of all employees (58%) are more attractive than those without those features.

Indian cities have followed a different development trajectory compared with their international counterparts.

Internationally, city centers primarily witness a high concentration of Grade A office spaces while, peripheral locations are either residential or home to small, often inconsequential, workspaces. However, in India, city centers are often historical sites dotted with old office stock (sometimes with restrictions on refurbishment or structural changes) and residential /retail spaces, which has caused Grade A office spaces to primarily be concentrated in the peripheral locations. As a result, most of the certified stock can be found in peripheral business districts of Indian cities.

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Summing Up…

ESG is definitely not a passing fad, as organizations across industries have realized its importance in achieving efficiency and meeting social obligations. Also, as consumers are becoming conscious, they are inclined towards brands that are ESG compliant. Thus, it’s no more a ‘good to have’ but a ‘must have’ for organizations to sustain in the future. With real estate having an important play in ESG strategies, developers, investors, and occupiers are already making a shift to Grade-A buildings to ensure sustainability and health & wellness for employees.?