How ESG and DEI affect your real estate portfolio
Environmental, social, and governance (ESG) frameworks are nearly ubiquitous in today’s business world—and commercial real estate is no exception. Real estate portfolios with strong ESG deliver higher returns than traditional ones. ESG touches nearly every aspect of your business, from the type of energy used to the number of remote or hybrid workers your tenants have (and everything in between).
Social pressure and governmental regulations increasingly call for transparency and reporting around ESG initiatives and outcomes. Higher ROI and lower expenses are the rewards for operating a sustainable, socially responsible portfolio.
Environmental governance is pretty straightforward. While it may mean different things to different portfolios or locales, generally, it means aiming to reduce carbon emissions and pollution, relying on renewable energy sources, being more energy-efficient, and making business decisions and strategies that help you achieve these goals.
But what about the “S” in “ESG”? Contrary to what some may think, it doesn’t stand for “sustainability.” So what does social governance mean for your company?
Social governance and diversity, equity, and inclusion
Good social governance, by definition, encompasses employee well-being and safety; community impact; and diversity, equity, and inclusion (DEI). It ensures your company is operating in a way that supports the diverse communities around it and the humans who work for it, understanding how your business affects these communities, and responding to feedback with real changes.
Social governance and DEI aren’t just human resources policies. High ROI is the reward for well-executed DEI strategies, and that affects all aspects of your real estate portfolio. Where once the balance sheet was the major driver of valuation, intangible factors now directly affect it. Engaged, diverse employees and satisfied tenants drive up the value of your portfolio. And by prioritizing ESG, you can demand higher rents and qualify for tax incentives.
Companies prioritizing diversity and inclusion as part of their social governance policies will attract more of the best and brightest talent and will retain them longer than their competitors. Plus, inclusive cultures foster better decision-making and higher employee satisfaction. A recent McKinsey report revealed that companies with higher rates of gender diversity in executive leadership are 25% more likely to have above-average profitability.
Governmental policies also factor into your DEI efforts. New laws are cropping up at the federal level, which will necessitate measuring and reporting your social governance results. Additionally, corporations and their stakeholders require transparency into the ESG and DEI policies of everyone they do business with—investors and customers no longer have an appetite for exploitative policies that harm the environment and the people in it. It’s bad PR that casts your brand in a negative light.
Put it all together, and the aim for leading real estate companies is clear: Be a standout among your real estate competitors, a welcome part of the communities your real estate portfolio operates in, and a champion for your employees with an ESG strategy that incorporates diversity, equity, and inclusion.