ESG (Environmental, Social and Governance) is a topical subject on the minds of many investors today. For many, the term brings to mind environmental issues like climate change and resource scarcity, and while these are important elements of ESG, the term in fact means much more and covers social issues, including labour practices, talent management, product safety or data security, and governance matters, such as diversity, executive pay, tax management and business ethics.
As the climate warms and sea levels rise, we are reminded of the negative impacts of global warming, and of the extent to which economic growth and the effects of climate change are interlinked. This is especially true for small island states like Malta, where the effects of climate change can be disproportionately felt, particularly due to our relatively small land mass, sea-fronted borders and low-lying areas. Within this context, real estate certainly has a role to play, both as a culprit, in emitting carbon, and as a catalyst, by spurring vast amounts of investment into resilience against the negative impacts associated with climate change.
In tandem, in a Maltese society where 20.1% of the population are at risk of poverty or social exclusion, and 9.9% are classified as being materially or socially deprived (NSO 202/2020), the social aspects associated with investing in affordable housing cannot be overlooked either. As Malta comes to grips with rising income inequality, the long-term trend of urbanisation and an ageing demographic, the reality of affordable housing is set to only become more challenging.
As part of the fight against climate change, the EU is intensively pursuing a green transition through the European Green Deal and the Action Plan on Financing Sustainable Growth. The Recovery and Resilience Facility is also making large-scale investment support available to make European economies and societies more sustainable, resilient and better prepared for the challenges and opportunities of the green and digital transitions. Funding is also supported by stricter regulations, as a review of the Energy Efficiency Directive and the Energy Performance of Buildings Directive takes place during 2021. All of these initiatives seek to ensure the goal of halving greenhouse gas emissions by 2030 is achieved. Other Europe-wide initiatives, such as the EU Taxonomy, will also support the goal of achieving carbon neutrality by 2050.
Challenges and way forward
Sustainable construction and buildings are not new issues contemplated by the real estate sector. What is new is the momentum that has picked up around the topic of sustainability in recent years. In considering the impacts of real estate on climate change, buildings represent a considerable share of energy consumption and hence emissions. Electricity, heat production and industry are all activities that are largely housed in buildings, be they residential, commercial or industrial. In Malta, it is estimated that buildings contribute to around 15% of total greenhouse gas emissions (Long Term Renovation Strategy 2050 - Consultation Document May 2021, Government of Malta), and so curbing these emissions is crucial to our journey towards climate neutrality. If one were to also consider emissions from transportation, including logistics, roads and airports, the infrastructure side of real estate may be further implicated.
Since the issue of sustainability and climate change is particularly complicated in the context of real estate, some key considerations include:
- Energy transition: Due to high levels of energy consumption and a strong dependence on fossil fuels such as oil and gas, real estate represents a key element in implementing a more sustainable energy supply. Actively managing the energy transition away from fossil fuels to renewable energy sources significantly reduces the climate-related risks for investments.
- Circular economy: A relevant portion of CO2 emitted by buildings relates to the construction materials used. Concrete and steel are highly energy-intensive and robust building materials that can outlast a building's normal useful life. A building's CO2 emissions can be significantly reduced if eco-friendly building materials are used instead, such as bamboo or precast concrete, or if building materials no longer required are recycled, thus taking a further step towards a circular economy.
- Impact valuation: One key challenge is that data on emissions by buildings is often not sufficient or available, leading real estate companies to make assumptions to estimate emissions. Impact valuation can therefore help to quantify how the investments contribute to rising temperatures through emissions, while also gauging the influence of greenhouse gases trapped within the building.
- Sustainable finance: Retail and institutional investors are placing greater store in investments satisfying certain non-financial standards. Real estate investments, which for instance are suitable for green bonds, can combine improved terms and conditions with a positive impact.
- ESG in deals: Environmental, Social and Governance criteria also need to be taken into consideration in the acquisition process. Those who address these issues as part of their ESG due diligence are able, on the one hand, to identify interesting investments, while on the other, to collect relevant data when a property is acquired.
One thing that has become clear during the COVID-19 pandemic is that companies that have a high level of strategic resilience have an advantage over companies that have not given any thought to such crisis scenarios before. This issue will remain at the forefront for the sector because the challenges arising from a changing climate can lead to new crises for the real estate industry. Companies that consider the potential impacts and on finding the fitting solutions to them today, will be at a clear advantage tomorrow.