Environmental, Social, Governance (ESG) issues are not new but are now front and center for commercial real estate (CRE).
Over the past decade, ESG has gained momentum. However, actually demonstrating impact around climate presented many hurdles, from legislation roadblocks to a lack of technology solutions, and frankly, the sense of urgency, to proactively tackle ESG — it was often a “nice-to-have” for many organizations and sectors. However, in 2019 we saw a societal shift that made climate change and the “E” in ESG a top priority globally. Surprisingly, ESG only continued to gain momentum in 2020 as the pandemic raged on. For CRE, an industry already grappling with the devastation caused by COVID-19, the ESG buzz can be overwhelming. But with buildings contributing 40% of U.S. carbon emissions annually, CRE will certainly be under the ESG microscope. And therein, opportunity awaits.
Four trends related to ESG are aligning just right in 2021 and empowering leading CRE owners and investors with a promising path toward meeting ESG requirements while driving economic recovery.
1. New Administration, Climate Plan in HandThe new administration is here and has already taken action on one of its top priorities, second only to the health crisis — climate change. Within hours of coming into office, President Biden took steps to rejoin the Paris Climate Agreement and halt Arctic oil leasing. Unlike past climate plans, the new administration’s plan specifically calls out the need to reduce building carbon emissions as one of the 9 key areas of focus. Now, the Biden administration can play a critical role in setting more aggressive U.S. emissions-reduction targets and encouraging others to follow suit. This undoubtedly will have a trickle-down effect on the state and local levels as they evaluate their own climate and smart city plans — all with their own compliance requirements and associated penalties for non-compliant assets. In fact, several states have continued the work around their own climate plans. Massachusetts is currently considering a bill that would allow cities to set stricter building emissions standards than the state’s. Many cities in the U.S. are also pushing forward climate plans. Local Law 97 in New York City requires buildings larger than 25K sq. ft to reduce carbon emissions by 40% by 2030 and by 80% by 2050. Targeted at the contributors of 60% of the city’s carbon emissions, owners of non-compliant buildings face multimillion-dollar annual fines beginning in 2024. CRE no longer has the luxury of delaying and avoiding ESG. However, actionable asset management strategies that successfully work toward compliance is possible. In fact, Carbon Lighthouse uses energy efficiency to offer our CRE clients both the carbon reduction impact required by new and upcoming regulations while also optimizing assets for increased NOI (by an average of $0.20 – $0.40 per square foot), improved operations (20% – 30% energy savings) and data-backed reporting demonstrating ESG impact. 2. Capital Markets’ ESG Focus The world's leading pension funds and investors are using ESG frameworks to evaluate investment opportunities. New York’s $226 Billion Pension Fund, one of the world’s largest and most influential investors, will divest from many fossil fuels in the next five years and sell its shares in other companies that contribute to global warming by 2040. For CRE, Limited Partners (LPs) and other CRE investors like Blackstone, BlackRock, and Goldman Sachs are demanding proof of ESG impact and actively divesting from companies that can’t provide measurable, trackable carbon reduction. Carbon Lighthouse is already helping leading CRE owners and investors demonstrate real carbon reduction impact to investors and tenants alike as is evident in annual ESG reports from Alexander & Baldwin, Ventas, Hawaiian Airlines, and The Carlyle Group. Further, our Efficiency Production service simultaneously delivers added operational and financial value. Eric Smith, EVP of Business Development at L&B Realty Advisors, LLP states, “This past year, we collaborated closely with Carbon Lighthouse to fully tap the benefits of Efficiency Production as we navigated various operational and business shifts knowing Carbon Lighthouse would bring the expertise and technical tools to continuously optimize our assets while helping L&B innovate important ESG solutions.”3. Tenant ESG Demands Bring Competitive OpportunitiesThe pandemic has fueled many debates about the future of the office. While office space utilization may shift, tenants will still occupy those spaces. Similarly, hoteliers must consider guest demands. Now more than ever, tenants and guests have their own ESG priorities and come to landlords and hoteliers with a list of ESG-related questions — far beyond, “Is your building LEED or Energy Star certified?” or “What are your water conservation or recycling programs?” Employers recognize the value of ESG initiatives in attracting and retaining top talent and they’re proactively seeking opportunities to fulfill employee sustainability demands including in the buildings they work in. This is especially true of the larger, long-term corporate tenants or group bookings that can have an outsized impact on a portfolio’s economic recovery. Those landlords and hoteliers that can effectively demonstrate real climate impact to existing and prospective tenants and guests establish a competitive advantage to fuel current economic recovery and longer-term portfolio performance. 4. Technology is at the ReadyOne of the biggest challenges CRE (or any industry) has had to face around ESG is showing proof of actual impact. How much energy was saved? How much were carbon emissions reduced? What was the ROI on ESG investment? The current building stock is woefully outdated lacking the systems and tools needed to nimbly manage general building operations much less meet today’s ESG market demands. The answer lies in the building data now available through technology advancements in AI, machine learning, sensors, analytics, and other technologies that are making it possible and affordable for CRE to effectively tackle and successfully achieve their ESG goals. CRE now has the opportunity to modernize and set a path forward with the accountability, flexibility, and resilience that will define the CRE of the Future. Yet, CRE won’t be able to meet industry, investors, or occupant needs without a solution to usher in the much needed digital transformation. “For more than a decade, Carbon Lighthouse has been empowering CRE owners with the energy efficiency and operational solutions required to meet the changing needs of the industry, investors, and occupants,” said Brenden Millstein, President overseeing Product at Carbon Lighthouse. “Now, Carbon Lighthouse is using our decade’s worth of real building expertise, enhanced technology platform, and our vast data-capturing capabilities to help CRE quickly achieve the new occupant, climate, and business goals being mandated by the new market landscape.”Carbon Lighthouse’s Efficiency Production service uncovers energy efficiency opportunities within 60 days to deliver real, demonstrable climate impact coupled with new financial and operational value — at any stage of the asset lifecycle, in any geography. From Class A office and hospitality to retail and multifamily properties Carbon Lighthouse will provide that ESG edge in today’s highly competitive CRE market. To hear how CRE leaders at L&B Realty Advisors and Ohana Real Estate Investors are already seeing positive impact from their ESG investment strategies, watch the webinar we hosted in February, 2021, “How ESG Will Drive Value and Opportunity for CRE’s Economic Recovery."