In today’s dynamic business landscape, real estate is facing a defining moment. Once a world of bricks and mortar focused solely on returns, the industry now finds itself at the crossroads of environmental responsibility and commercial success. ESG considerations have surged to the forefront, driven by mounting climate pressures, evolving investor expectations, and tenants who demand more from their spaces. As business sustainability strategies become essential to long-term success, many real estate firms are rethinking their approaches to resilience, growth, and value creation. But what is ESG in real estate, and how can businesses harness ESG practices to not only meet rising expectations but unlock new opportunities? Keep reading as we explore this below.
What is ESG in real estate? Breaking it down
To truly understand what is ESG in real estate, it’s essential to break it down into its three key components: Environmental, Social, and Governance factors.
Environmental (E)
This dimension focuses on reducing the negative environmental impact of real estate assets. It includes:
- Energy efficiency: Reducing energy consumption through green building design, retrofitting, and renewable energy use.
- Carbon emissions: Lowering greenhouse gas emissions associated with building operations and construction.
- Water management: Implementing efficient water use systems and rainwater harvesting.
- Waste reduction: Recycling construction materials, reducing construction waste, and managing operational waste.
- Biodiversity: Preserving green spaces and integrating nature into urban development.
Social (S)
This focuses on the impact of real estate on people and communities, including:
- Health and well-being: Designing spaces that promote occupant health, comfort, and safety (e.g. natural light, air quality).
- Diversity and inclusion: Creating inclusive spaces accessible to people of all abilities and backgrounds.
- Community engagement: Supporting local communities through responsible development and shared spaces.
- Affordable housing: Including social housing and addressing housing shortages.
Governance (G)
This refers to how real estate companies are governed and make decisions:
- Transparency and reporting: Sharing ESG performance data with stakeholders and adhering to standards like GRESB (Global Real Estate Sustainability Benchmark).
- Ethical conduct: Ensuring compliance with regulations, anti-bribery laws, and fair treatment of tenants and suppliers.
- Risk management: Identifying and mitigating risks related to climate change, social issues, and governance.
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Why ESG matters in real estate today
ESG is transforming real estate investment and management. With buildings contributing around 39 percent of global carbon emissions (28 percent from operational activities and 11 percent from construction and materials), the need for sustainable building practices is clear. Moreover, the EU’s Corporate Sustainability Reporting Directive (CSRD) is raising the bar for real estate companies by mandating more detailed ESG disclosures. This shift towards transparency and accountability is ensuring consistent reporting of ESG impacts.
At the same time, occupier demand for green buildings is growing. A recent study found that 70 percent of tenants are willing to pay a premium for spaces in sustainability-certified buildings, reflecting rising expectations for healthier and more environmentally responsible workspaces. The financial benefits of ESG compliance are also compelling. In other words, LEED-certified buildings command an average 11.1 percent rent premium and experience lower vacancy rates compared to non-certified properties.
Investors are taking notice, too. A JLL survey revealed that 50 percent of UK investors now prioritise ESG criteria in their real estate purchasing decisions, marking a significant shift towards sustainability-driven investment strategies. Ultimately, ESG is uniting the real estate sector around a common purpose. As environmental challenges mount and societal expectations rise, sustainability is becoming a key driver of resilience, profitability, and long-term value creation in the industry.
How ESG is driving real estate value
Companies that understand what is ESG in real estate and apply these principles proactively are positioning themselves as leaders, attracting investors, tenants, and partners who value sustainability.
Enhanced property valuation
Integrating ESG practices into real estate assets has been shown to increase property values. Energy-efficient buildings not only reduce operating costs but also appeal to environmentally conscious tenants, leading to higher demand and, consequently, higher valuations. Moreover, properties with strong ESG credentials are better positioned to meet regulatory requirements, reducing potential compliance costs and risks.
Investor confidence and financial performance
Investors are increasingly considering ESG performance as a critical factor in their decision-making processes. Properties that demonstrate strong ESG practices are perceived as less risky and more resilient to market fluctuations. This perception can lead to increased investor confidence, potentially resulting in better financing terms and lower capital costs.
Regulatory compliance and risk mitigation
With the rise of regulations focusing on sustainability and environmental impact, properties that adhere to ESG standards are better equipped to comply with these requirements. Compliance not only avoids potential fines and sanctions but also positions properties as forward-thinking and responsible investments.
Operational efficiency and cost savings
Implementing ESG initiatives often leads to improved operational efficiency. For instance, energy-efficient systems and sustainable building materials can significantly reduce utility costs. Over time, these savings can enhance the net operating income of a property, thereby increasing its overall value.
Market differentiation and competitive advantage
In a competitive real estate market, ESG-compliant properties can differentiate themselves by appealing to tenants and investors who prioritise sustainability and social responsibility. This differentiation can lead to higher occupancy rates and the ability to command premium rents, further enhancing property value.
How real estate companies can approach ESG
Real estate companies can approach ESG by integrating sustainability and social responsibility into every aspect of their operations, from property development and management to investor relations.
1. Conduct an ESG assessment
Start with a comprehensive review of current operations, identifying key ESG risks and opportunities across your property portfolio. This may include energy use, water consumption, tenant well-being, and governance structures.
2. Set clear ESG goals and targets
Establish measurable goals aligned with global frameworks like the UN Sustainable Development Goals (SDGs), the Global ESG Benchmark for Real Assets (GRESB), or the Task Force on Climate-Related Financial Disclosures (TCFD). Targets could include carbon neutrality, waste reduction, or community engagement.
3. Integrate sustainability into building design
Design and retrofit buildings with energy-efficient systems, sustainable materials, and circular economy principles. Consider certifications like BREEAM, LEED, or WELL Building Standards to demonstrate environmental and social performance.
4. Improve data collection and transparency
Implement digital platforms to track energy consumption, emissions, and social performance metrics. Regularly disclose ESG performance through sustainability reports that comply with CSRD or Global Reporting Initiative (GRI) standards, enhancing investor and stakeholder confidence.
5. Engage tenants and communities
Create tenant engagement programs that promote sustainable behaviour, such as energy-saving initiatives or recycling schemes. Partner with local organisations to deliver social value, from affordable housing to community development.
6. Strengthen governance and compliance
Ensure board-level oversight of ESG strategies, with clear roles and responsibilities. Develop policies addressing diversity, inclusion, ethical business practices, and risk management. Align with legal requirements like the EU Taxonomy and CSRD.
7. Invest in training and capacity building
Educate internal teams on ESG principles and equip them with the skills to implement sustainability initiatives. This includes facilities management staff, leasing teams, and senior executives.
8. Monitor and adapt
Continuously review ESG performance, leveraging benchmarks and feedback. Adjust strategies to stay ahead of evolving regulations, investor expectations, and market trends.
Conclusion
As the real estate sector continues to evolve, understanding what is ESG in real estate and embedding these principles into every facet of business strategy will be the key to unlocking resilience, profitability, and long-term success. Companies that embed ESG into their operations are better positioned to thrive in an evolving landscape, attract investors, meet regulatory demands, and deliver long-term value. Explore our organisation-wide corporate sustainability training to build the knowledge and skills your teams need to champion ESG in real estate.
