Sixty-seven percent of Asia-Pacific investors refuse to invest in real estate funds that do not have a defined environmental, social and governance (ESG) policy, according to a 2019 survey by PERE, a publication that tracks private real estate markets. And globally, across sectors, investments into office space have made the greatest strides towards ESG commitments, with 80% experiencing moderate or significant progress.

 

“Our investor base, which includes a lot of institutional investors, many from Europe and the US, are very much into ESG,” Tom Miller, LaSalle Investment Management’s head of development and sustainability, Asia-Pacific, states during a panel discussion organized by The Asset at the 2nd ESG Forum in Hong Kong. “When we are trying to attract investors, we have to prove to almost all of them now what we are doing on the ESG side.”

 

“The way we look at ESG,” says Adrian Cheng, director of Fitch Ratings’ Asia-Pacific corporates team, “is by examining the potential downside risks of a company not adhering to ESG factors that affect a company’s credit worthiness.” When giving an ESG score, Fitch focuses more on a company’s governance than its environmental or social factors. But he admits that investors are asking more questions about these factors, especially of homebuilders and urban renewal projects in China, as ignoring them can have wide repercussions and result in costly lawsuits.

 

ESG is not only about spending money but saving it in the long term, argues Ada Wong, Champion REIT’s chief executive officer. “We align all the investment or capex with the ESG mindset. And, of course, ROI (return on investment) is in the formula for every decision we make because REITs (real estate investment trusts) are all about value creation.”

 

ESG scoring and third-party certification is the starting point for most developers adopting ESG principles. LEED (leadership in energy and environmental design) is the original and most common certification covering a building’s use of energy, water and materials. Owners must disclose and report data in all or at least part of these areas to be defined as green.

 

As the building certification market has grown and diversified, other certifications have appeared, such as BREEAM (building research establishment environmental assessment model), CASBEE (comprehensive assessment system for build environment efficiency), GRESB (global real estate sustainability benchmark) and the WELL Building Standard, focusing on health and wellbeing.

 

“In the beginning, it was mainly commercial spaces and factories looking at LEED certification because their stakeholders were asking for it or it was good for marketing,” relates Alessandro Bisagni, founder and president of BEE Incorporations, a sustainability consulting company.

 

But certification is just a tool to collect data and improve efficiency, Bisagni argues. “There has been a dramatic change in the market recently with a move away from static certification (documentation) to performance-based certification where it’s not about what you are saying, but what you are doing and the data you are proving.”

 

Miller says LaSalle uses certification to add value. One of the things it does when it transforms a B-minus building into an A-minus one is get it a LEED certification. “We make improvements, send it in for a score, and it goes up. That’s capital value for us when we go to sell the building.”

 

Traditionally, New World Development would get a LEED or a BREEM Plus certification and be done with it, says Venisa Chu, senior manager of the developer’s sustainability department. But now it uses certification as a tool and finds value working with tenants under its Sustainability Tenancy Pledge programme, providing them with free data metering and helping them build a sustainability portfolio. “We make sure everything is transparent, and we’re pushing the ESG agenda forward.”

 

“We want to be innovative, be the change-makers of tomorrow, and ESG is another platform for us to do that,” Chu adds. “We definitely cannot stop at certification as it’s not enough in this competitive environment.”

 

Champion REIT’s Wong sees certification as a basic requirement as the trust receives a lot of requests for proposals from tenants asking about their type of certification. She agrees that an ESG commitment goes beyond the building, its water and energy savings. “It’s about the environment you create so that your tenants and stakeholders can benefit from ESG. That adds the social element.”

 

“A certification is the starting point of a conversation,” reasons Ashley Hegland, Swire Properties’ sustainable development advisor, noting that upwards of 50% of a commercial building’s energy consumption is controlled by the tenants. “So, even with the greenest building on the planet, we need to engage and educate our leasing teams [to work with tenants].”

 

Beyond certification and landlord-tenant engagement, spreading ESG engagement down the supply chain is the next challenge. And, with architects and engineers well-versed in ESG’s merits, the focus is shifting to material suppliers, explains BEE’s Bisagni, and away from the impact of their materials to their content to discover their chemical make-up, whether they are recyclable or regionally sourced.

 

“Now, it’s about disclosure,” he says. “Suppliers are scrambling to get that data. Large companies are requiring suppliers to disclose that data and not everyone has it.”

 

“This is one of the biggest challenges we face,” Swire’s Hegland states. “It’s difficult to get upstream data, such as embodied carbon content in cement.”

 

Another challenge on the horizon is whether European governments will mandate pathways to carbon neutrality according to commitments related to the Paris accord on climate change, Miller shares. “The standard is that buildings contribute 30% of the carbon emissions on an annual basis.”

 

“So, if you are in a society, where by edict regulations can be put in place, which China is, you can find yourself with assets that don’t meet the new regulations and are going to lose capital value quickly,” Miller warns. “Between now and 2030, nationally determined, contribution-type rules are going to be coming fast and furious in most of our locations.”

 

Sometimes, it’s not investors pushing ESG, but developers pushing investors to recognize the need for an ESG component to protect an asset’s medium-to-long-term value, Miller adds. “We need to make sure, risk-wise, that we don’t end up on the wrong side of ESG lines being drawn up by governments, capital markets or whatever.”

 

Future risks aside, green technology and ESG initiatives are becoming cheaper and more easily accessible. “When we started to do green buildings, there was a 20% to 30% added construction cost,” Bisagni relates. “Now, there is little-to-no added cost to doing a LEED certification.”

 

It’s a bit of a different story with health and wellness because the industry hasn’t caught up. Health and wellness - how a building is designed, operated and constructed to improve its occupants’ health and wellbeing – is becoming a huge part of ESG, Bisagni explains, adding, “it’s the number one discussion right now, [hopefully] it won’t be about green or non-green buildings, just buildings, high-quality buildings. There won’t be a difference”.

 

But the work starts now. “One hundred percent of our property development decision-making involves ESG because the consideration starts when we acquire a piece of land,” New World’s Chu reveals. “We have established ESG roadmaps for business units from now until 2030.”