HomeSpotlightESG is the way forward for Indian realty

ESG is the way forward for Indian realty

Three letters – ESG – are fast becoming main focus of the corporate world as it incorporates Environment, Social and Governance factors into business functioning, both internally and throughout their supply and value chains. Today’s ESG induced business strategies go beyond the traditional objectives of profit maximisation and cost minimisation and encompass vigilant resource consumption, reduction in CO2 emissions and climate resilience. It hinges on factors as varied as equity and inclusion to the social impact of business activities, transparency in corporate governance policies and board diversity. The need for ESG has arisen out of the issues of climate change, expectations of the investors and lenders, stringent regulatory requirements. Businesses are beginning to formalise ESG related initiatives plans on account of tangible, regulatory and reputational risks.

ESG & Realty

Buildings account for nearly 40% of global greenhouse gas emissions and 40% of raw material use. Therefore, assessing and imbibing ESG into real estate and construction is paramount for countries to be able to achieve their sustainability goals.

“For those of us in the real estate business, the need to imbibe ESG principles is not just a moral imperative, but also a fiduciary responsibility,” says Anshuman Magazine, Divisional President – India, South East Asia, Middle East & Africa, CBRE.

Awareness is growing that real estate can have a significant social impact either through the form of rehabilitation of public spaces (indirectly attributing value to existing real estate), affordable housing, social housing, and care centers, or through an environmental focus investment on new buildings such as green buildings.

ESG gaining credence

There has been a tremendous rise in the capital allocation towards responsible investment. In 2020, 38% of the global investment flows have been towards ESG commitment. PwC’s Responsible Investment Survey, conducted in 2019, indicated that higher than three-fourths of the Global LPs have made a public commitment to include ESG considerations when investing.

“Our analysis of the certified built environment in India shows that this transformation is already underway. The past five years have seen a pronounced push towards green buildings; the period saw a 37% increase in the supply of certified buildings, with the addition of 78 million sq. ft. of certified stock, compared with the previous five years (2012-2016). Moreover, developers are now seeking nationally and internationally recognised green certifications such as LEED and IGBC that would be popular among their potential tenants,” says Abhinav Joshi, Head of Research – India, Middle East & North Africa, CBRE.

Several companies adopt Green path

Several Indian companies have joined hands with the Government to take India towards the path of lower greenhouse gas emissions, aligning themselves with India’s commitment under the Paris Agreement. Independently, corporates in India are also committing towards the net zero ambition before mid-century.

“We believe that our ability to develop and maintain sustainable and energy-efficient buildings is a clear competitive advantage in a market increasingly focused on high-quality sustainable workspaces…… Our ESG strategy focuses on evolving and implementing sustainable interventions that contribute towards building a safer, healthier and greener environment for our staff, occupiers, vendors and the communities in which we operate, while delivering enhanced returns for our investors,” says Embassy Office Parks REIT in its latest annual report. The company has announced its commitment to achieve net zero carbon emissions by 2040 across its operational portfolio.

100% of all new developments of Mindspace Business Parks REIT, another listed REIT, will be LEED/IGBC certified with minimum Gold rating in future. By 2025, 95% of total portfolio of the company will be LEED/IGBC certified with minimum Gold rating. Already 36 of its buildings are ‘Green Certified’ by LEED AND IGBC. The company aims to transition its entire vehicular fleet to electric by 2030. The company has already installed 950+ EV charging points. For the company, prioritising ESG also makes business sense as its tenants that include some of the most revered global IT and corporate giants, already have the highest degree of ESG commitments.

ESG compliance makes economic sense

Being ESG compliant makes a lot of economic sense given that the tenants are also seeing value in properties that are energy efficient and sustainable. Businesses can market their product as net zero ambition structure to the investors and stakeholders. Unless businesses move to lay out an ESG framework today and work towards net zero ambition, there is a good chance that they could be out of business soon. International mature markets have shown that buildings with green certification have fetched higher rents and higher sale price as well as witnessed lower vacancies as compared to traditional projects. In India, the focus on better air quality over the past couple of years has meant that sustainable and green is not only a long-term strategy, but also that some of these parameters are translating into immediate, almost tangible benefits for occupiers.

Of course, the government has been leading the way with steps such as the 2070 Net Zero goal, a sovereign green bond issuance and ambitious renewable energy plans. However, a lot more needs to be done to create a favourable environment for increased number of realtors committing under ESG. Potential steps include bringing down the cost of green technologies, incentivising ESG compliance, making India attractive to global ESG investors with the development of a sustainable taxonomy.

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