Office sector leads the way on ESG

Investors want all buildings to be sustainable, but some property sectors are more difficult than others.

Investors see wide variance in the ESG credentials of different property types, but managers argue there are practical limits applying to each sector.

The ESG Investor Survey 2019 shows investors consider the office sector to have made the most progress in terms of commitment to ESG, with 29 percent saying they see significant progress and 51 percent seeing moderate progress.

In sharp contrast, only 7 percent of investors see significant progress in the retail sector and 47 percent see little or no progress. Other sectors showing little progress are healthcare and hospitality. Investors were divided on progress in the multi-family sector, with 21 percent seeing significant progress but 28 percent seeing little or no progress.

Billy Grayson, executive director at the Urban Land Institute’s Centre for Sustainability and Economic Performance, says: “Different real estate sectors have different challenges in driving ESG. For multi-family, the nature of leases and tenant attitudes toward sustainability make it tougher to make deep investments in sustainability that will pay off.

Similar challenges exist in retail and industrial spaces, where tenants pay utility bills directly, and may not have an easy way to partner with their building owners to drive improvements in sustainability.”

For managers of real estate assets, improving sustainability is often a matter of control. Sophie Carruth, head of sustainability, Europe, at LaSalle Investment Management, says: “With multi-let offices, where we have operational control of the assets, it is clear cut and easy for us to make sure we are managing the building so that it is operationally very energy and water efficient.

“However, with a shopping center, the landlord has control of shared spaces, but retail units tend to operate quite independently. They often have their own heating and cooling systems, and are independent units within a bigger building. From an environmental point of view, that can be a little bit more challenging.”

Carruth also notes that, while office tenants are increasingly concerned about ESG factors related to sustainability and employee experience, in retail there is “a very mixed bag of attitudes towards ESG.”

She says: “Retailers are incredibly cost sensitive, and there’s a lot of scrutiny of, for example, service charges within shopping centers. However, I think these attitudes will change because of changes in the way society views sustainability.”

While retail might be less energy efficient than office, the position of shopping centers as community assets may help them to make up environmental shortcomings with social sustainability.

Mathieu Elshout, senior investment manager, private real estate, at PGGM, says: “The more control a landlord has over its properties, the more control they have over sustainability. We would however argue that a building can only be run in the most sustainable way when landlord and tenant(s) work closely together.”