The Path to ESG begins with “E”
More than $12 trillion in assets are being managed to sustainable investment strategies, according to the U.S. Forum for Sustainable and Responsible Investments, and that’s just in the U.S. On a global scale, the amount of ESG investments exceeds $40 trillion – an amount that has tripled since 2012. This rapid growth creates an enormous opportunity for real estate companies to create added value and drive new investment, but many are uncertain of how and where to get started.
Because impact investing is still relatively new, it can be challenging for firms to figure out how to fully incorporate environmental priorities into their multifamily properties. The key is to develop an ESG framework that is both rigorous and flexible enough to meet existing environmental standards while satisfying an evolving set of outcome measurements and reporting requirements.
As multifamily owners and operators dip their toe into this area and attempt to make sense of this rapidly changing landscape, here are three simple questions to get the process started.
1. Are you doing relevant things that matter?
Simply put, are the actions that you are taking making an impact on globally recognized environmental priorities? This may seem obvious, but as the environmental impact investing sector grows up, it is important to ensure that your environmental impact goals are aligned with widely recognized global priorities, such as those outlined in the United Nations Sustainable Development Goals (SDGs).
Let’s say, for instance, you’re investing in property upgrades and management practices. Investments in energy and water efficiency not only reduce operating expenses but they also can be directly linked to tangible SDG targets, whereas a marketing campaign that urges renters to recycle may be less impactful. It is also important to note that investors across the globe are increasingly holding property owners to ever higher standards. If you are already incorporating energy and water savings at your properties, it will be more important to demonstrate how your property is reducing greenhouse gas emissions that occur up front in the development process. Going forward, that means you should be considering the environmental impact of your building materials and construction techniques and how you can incorporate more clean energy sources at the property level to reduce your overall carbon footprint.
2. Do your actions reduce the risk to your portfolio or enhance your return on investment?
Just as multifamily owners and operators must consider the on-the-ground impacts of their investments in the communities and households they serve, they should also keep the 30,000-foot view in mind – i.e. the business outcomes and returns of their investment strategy. For example, do your energy and water savings reduce operating expenses and support stable returns on investment? Do the pay back periods for your green investments make financial sense? Do they create marketable advantages for you with competing properties? In short, a property has to find the right balance between environmental and economic sustainability.
3. Can you demonstrate that what you’re doing is working?
No impact framework is sustainable if it can’t be measured and proven out. Establish clear metrics of success at the onset – ones that can be backed by data or concrete evidence and that align with common standards like the United Nations SDGs. In the environmental impact space, there are already established metrics for measuring the impact of energy and water savings and reduced CO2 emissions. But, as more and more countries focus specifically on goals to eliminate dependence on fossil fuels, it will be increasingly important for investors and operators to find ways to quantify the environmental impact of their building materials and sources of energy as well.
The bottom line
As environmental impact and the ESG space in general gain acceptance in the multifamily sector, having a clear framework for your business will be critical to attracting the attention of impact investors. Although it can be a confusing space to dive into, the opportunity is ripe for firms that are ready to take a thoughtful (and measurable) approach to environmental impact.