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The Year in ESG: Climate Regulation Takes Center Stage

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New year, new ESG? 

On New Year’s Eve, the ball in Times Square is slated to drop, but the ball for ESG (environmental, social and corporate governance) will keep on rolling into 2023. 

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After a year of net-zero, legislative efforts, and diversity, equity and inclusion (DEI), it’s safe to declare ESG more than a fad or, in the spirit of the new year, more than a resolution.  

This year, ESG trends in commercial real estate reflected those of the nation at large. The real estate industry grappled with national measures, like President Joe Biden’s Inflation Reduction Act, as well as local legislation, like New York City’s upcoming Local Law 97. Likewise, the industry had to contend with ESG’s polarizing politics and work toward its often intangible diversity promises.

Each of these ESG-related stepping stones helped transition the framework from lip service to action. “If there’s one thing to take away, it’s that [ESG] is actually reality now,” said Sandra Benson, global head of industry transformation at construction management company Procore. 

As a whole, Benson rates commercial real estate’s progress in 2022 as “fair.” People generally understand the vision and the direction of the industry, she said, with the caveat that there is still plenty to improve upon. She hopes that next year will elevate that “fair” rating to a status that is “pretty good.”

For now, it is enough of a victory that commercial real estate is doing more than just talking about ESG. The framework has been a hot — but abstract — topic over the last few years. In 2022, however, the industry took specific, implementable steps.

Building owners, for example, widely reduced their assets’ carbon footprints through greenhouse gas reductions, carbon offsets and renewable, efficient sources of energy. Developers employed various proptech tools, like digital twins, to better understand tenant habits, energy consumption patterns and construction opportunities. Meanwhile, lenders and landlords continued to spearhead and participate in mentorship programs, such as Project Destined, aimed at opening doors for underrepresented youths.

Each of these efforts has continued — and created — momentum on both the environmental and social fronts. 

One factor influencing the industry’s proactivity was the expected disclosure rules from the federal Securities and Exchange Commission, said Hyon Rah, director of ESG consultancy at Savills. That effort put companies, suppliers, service providers and the like on notice, so they could no longer hide behind lofty commitments. 

Such legislation, on both the local and national levels, mandates more eco-friendly standards across the industry. In February, President Biden launched the Building Performance Standards Coalition: a $1.8 billion partnership to promote sustainable building. More recently, Biden announced a federal building performance standard specifically for government-owned real estate. The law demands that 30 percent of federally owned buildings achieve net-zero emissions by 2030. 

“Federal buildings have been strange outliers in the sustainability/ESG space because they are not bound by local regulations,” said Rah. “So this is a really exciting step forward.”

Many laws won’t come to fruition until after 2023, but as policies creep up with each passing year, the industry is already reacting. If you’re in New York City, for example, many ESG conversations dance around Local Law 97, which will enforce limitations on greenhouse gas emissions starting in 2024. Companies therefore have one more year to adjust their emissions accordingly, and the impending consequences have already proved effective.

“In places where these laws are in place, these [laws] are really becoming the forefront of not just looking at energy efficiency, but really integrating spatial strategies that are sustainable into your organizational ESG strategy,” said Rah.

For now, the focus remains on the present. This year was divided into two halves, said Joanna Frank, CEO of the Center for Active Design (CfAD). The first six months of 2022 saw an emphasis on net-zero commitments and carbon reduction strategies in compliance with the Paris Accord.

“The heads of ESG, the heads of sustainability, were really focusing on getting their climate commitments out,” Frank said. Through CfAD, Frank also works with healthy building certification Fitwel

Innovative technologies also helped push ESG initiatives forward. Smart building technologies were more widely adopted this year, with more buildings predicted to utilize digital and operational twins in 2023, said Procore’s Benson. In addition, the importance of adaptive reuse and a focus on resilience contributed to the year’s momentum. 

However, the majority of these efforts happened on a company-to-company scale, with individual real estate companies tailoring, promoting and working toward respective ESG strategies. Yet while every firm set its own goals, this year’s environmental efforts weren’t without collaboration. Climate-centric conferences — Egypt’s COP27 and Argentina’s World Mayors Summit, for starters — cropped up all over the world, promoting shared ideas and goals, as did efforts to support more standardization in energy efficiency, building decarbonization and embodied carbon metrics.

In the second half of 2022, said Frank, the industry circled back to social components, the “S” of ESG. Social trends have largely been riding the tailwinds of years prior. In 2020, for instance, DEI initiatives surged, though industry experts agree that such efforts still have a ways to go

Around 2020, health-promoting buildings similarly came to the forefront, and the trend has continued. The pandemic recentered real estate on better building strategies more generally, noting that more owners are upgrading their facilities to prioritize people, said Frank. 

“I almost see [health and wellness] more as going back to the basics that we forgot about,” said Rah. 

Buildings won’t increase in value if they have better indoor air quality, said Frank. Rather, they’ll lose value if they don’t. The same can be said for buildings that aren’t prioritizing resilience, social elements and other ESG-focused (read: people-focused) concerns.

Yet social metrics remain ESG’s least-used set of metrics, explained Frank, as real estate hasn’t yet rallied behind the “S” with the level of organization it’s shown for the “E.” The industry’s focus on the “S” has been foggy, tainted by the challenge to quantify social goals and outcomes. 

“I think the reason we’re focusing on the ‘E’ is it’s easier to quantify,” said Benson. “The ‘S’ is a little harder — how do you quantify social impact?”

Granted, 2022’s headway on environmental issues is likely due, not just to its measurability, but to the urgency of climate change. As natural disasters worsen, sea levels rise and environmental threats encroach on reality, environmental action — and pro-environmental construction — is increasingly imperative. Depending on the level of risk, future-proofing buildings is a burgeoning necessity. 

Yet environmental efforts overwhelmingly correspond to a set of metrics that make them more accessible, if not easier, to address. The real estate industry clearly understands the aspiration of net-zero, for example, and can therefore strategize to enact corresponding changes. 

On social matters, however, the industry lacks proper branding and has yet to harmoniously adopt, understand and articulate any one set of metrics. Fitwel has tried to address that with a guide quantifying the “S” through five main areas.

“It’s really just looking at real estate from that people perspective: What value do people bring to real estate, how do we create a built environment that’s optimized for people, and what does that mean for overall risk mitigation and value creation for real estate?” said Frank.

In fact, many social elements are already being addressed, but aren’t always recognized as such. Wellness and resilience can be considered both social and environmental matters. 

“I think there has been this tendency to separate lots of things that are actually very much connected and could be taken care of together,” said Rah. 

Flood risk mitigation, for example, is primarily about responding to environmental risks, but it’s also crucial for employee wellness and is often a matter of equity. 

By converging the categories within ESG, real estate companies can take action that addresses both simultaneously.  

And that’s a big opportunity going forward. 

“One of the trends that I was going to mention for 2023 was just more convergence of these interlinkages because we’re running out of time,” said Rah, emphasizing 2023’s creeping proximity to 2030: a year that ESG-related legislation, like Biden’s federal building performance standard, will take hold. 

Creating links between strategies that are already in play therefore allows the industry to do more with dwindling years and dwindling resources. If real estate can successfully link the “E” with the “S” — all in time to fulfill the “G” — perhaps Benson’s “pretty good” rating will come to fruition before 2023’s end.

Anna Staropoli can be reached at astaropoli@commercialobserver.com