Our Advisor’s Thoughts On: ESG and CRE — Lightening the Load

by Annelise Osborne, Senior Advisor Capital Markets

This past week’s headlines read “Carbon Dioxide, Which Drives Climate Change, Reaches Highest Level In 4 Million Years” and “Keystone XL’s Demise Shows Hard Road for New Pipelines” which highlights the national focus of decreasing carbon output. According to the US Energy Information Administration, commercial and residential buildings are responsible for 40% of US carbon dioxide emissions (Source). How can we in commercial real estate address carbon emissions and work to reduce the footprint and what is the financial cost?

Addressing the cost first, the financial gain of Environmental, Social and Governance (ESG) focused initiatives has paid off.

  • According to BlackRock’s Larry Fink, “During 2020, 81 percent of a globally — representative selection of sustainable indexes outperformed their parent benchmarks.”(Source)
  • According to S&P Global Markets, 19 of 26 analyzed ESG ETF and mutual funds outperformed the S&P 500 (27.3%-55% compared to 27.1%). (Source)

Outside of the obvious environmental and social benefits, these statistics highlight a financial benefit. ESG is an investment and is becoming a fiscal responsibility. Certain large fund investors, including Blackstone, BlackRock, Goldman Sachs, and New York State Pension will not invest without measurable and trackable carbon emission reductions.

Regulatory incentives are coming on both the federal and state level. The Biden administration has plans to decrease emissions by 50% by 2035. New York City law (LL97) now requires buildings larger than 25,000 SF to reduce emissions by 40% by 2030 and 80% by 2050. California has multiple acts including Los Angeles’s Green New Deal Act for carbon neutrality, the Buy Clean California Act, and Warehouse Indirect Source Rule.

With respect to carbon levels, emissions from buildings are generally derived from heating, cooling, lighting, and energy. Construction and manufacturing also contribute. Therefore, if the industry and individual landlords can find avenues for efficiency and energy conservation, the targets can be achieved. Innovation and technology are aiding in recognizing lower emission opportunities as well.

To achieve decreases in these levels, measurement and data become increasingly more important to quantify results. Enforcement from investors and regulators require metrics. Reliable data sources are needed as are standards for assessing environmental risk on the property and corporate level. Currently, there aren’t many consistent metrics and data is not always available and reliable. One ready to use option is RS Metrics’ ESGSignals® Platform-as-a-Service that provides real-time, reliable, independent, and verified ESG data on the asset level. The tool will also help your business intelligence strategies with competitive benchmarking and independent assessment processes with satellite-driven data.

As the commercial real estate industry continues to embrace the financial and environmental benefits of ESG, data will be easier to access and risk assessments will become more standardized. In the meantime, use a refillable water bottle.

Ms. Osborne is a finance executive with 25 years of experience in finance, commercial real estate, fintech, and investing. Her focus is on capital markets efficiency through data and automation. Currently, Annelise is Head of Strategy of Metechi, a commercial lenders marketplace using AI and machine learning. Previously, Annelise was COO of Propellr, a fintech broker dealer focused on efficiency and transparency in structured finance through blockchain technology. She has worked with PE, hedge and family office funds to develop new business lines, acquisitions, credit investments and ESG. Annelise spent 12 years with Moody’s Investor Service running ratings teams within the commercial real estate finance group and global investor outreach initiatives. She has worked in the US, UK, and Eastern Europe. Annelise is active in numerous industry organizations, corporate governance initiatives, and guest lectures at universities. She holds an MBA in Finance from Columbia Business School and a BA in Economics from The College of William and Mary.

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