ESG Initiatives for US Commercial Property Owners

Introduction

The commercial real estate sector in the United States is experiencing a significant shift towards environmental, social, and governance (ESG) principles. This transformation is fueled by a confluence of factors, including heightened investor awareness, increasing tenant demand, and an evolving regulatory landscape. The increasing frequency of climate-related disasters and their impact on property values further underscore the urgency of integrating ESG into commercial real estate. Moreover, the COVID-19 pandemic has intensified the focus on occupant health and well-being, pushing property owners and managers to prioritize indoor environmental quality and social responsibility. This report delves into the key ESG initiatives and programs that are most relevant and appealing to commercial property owners and managers in the United States, providing valuable insights to empower local independent companies to engage with this sector and contribute to a more sustainable future. Digital technologies are also playing a crucial role in this transformation, facilitating ESG data collection, analysis, and reporting, making it easier for stakeholders to track progress and make informed decisions.

Top ESG Factors Driving Investment in US Commercial Real Estate

Understanding the ESG factors that influence investment decisions is crucial for engaging with commercial property owners and managers. Research indicates a significant rise in the adoption of ESG criteria among investors. CBRE's 2022 U.S. Investor Intentions Survey reveals that 70% of respondents have already incorporated ESG criteria into their decision-making, with another 10% planning to do so soon ¹. This represents a substantial increase from the 56% reported in 2021, underscoring the growing importance of ESG in commercial real estate. Furthermore, capital for impact funds has surged from $2.6 billion in 2019 to nearly $34 billion in 2022, with North America accounting for 53% of this growth ². It is also projected that ESG-mandated assets will comprise half of all professionally managed assets globally by 2024 ².

Key Drivers:

• Protecting the Environment: Environmental protection is a primary goal for 85% of investors, reflecting a growing awareness of climate change risks and the need for sustainable building practices ¹.
• Preserving Asset Value: Investors recognize that ESG factors can significantly impact the value of real estate assets. By incorporating ESG considerations, they aim to protect and enhance their investments over the long term ¹.
• Meeting Tenant Demands: Tenants are increasingly seeking environmentally friendly and socially responsible spaces, driving demand for buildings with strong ESG performance.
• Attracting and Retaining Talent: Companies with strong ESG profiles are often more attractive to employees, particularly younger generations who prioritize sustainability and social responsibility.
• Improving Financial Performance: Studies have shown a correlation between strong ESG performance and improved financial outcomes in commercial real estate, including higher rental rates, occupancy rates, and property values ³.
• Mitigating Risks: ESG factors can help identify and mitigate potential risks, such as climate-related hazards, social unrest, and governance scandals, which can negatively impact property values and investment returns ⁴.
• Accessing Capital: Investors and lenders are increasingly favoring projects with strong ESG credentials, providing access to more favorable financing terms and a wider pool of capital ⁴.
• Compliance with Regulations: A growing number of cities and states are implementing mandatory ESG benchmarking and disclosure requirements for commercial buildings, driving the need for proactive ESG strategies ⁵. Specifically, 49 cities and six states in the U.S. have already mandated some form of ESG benchmarking and disclosure for commercial real estate properties ⁵.

Relative Importance of Environmental, Social, and Governance Practices

While all three pillars of ESG are essential, environmental performance currently holds the greatest weight in the US commercial real estate sector ². This prioritization stems from the increasing focus on climate change, the availability of quantifiable environmental metrics, and the tangible impact of environmental factors on building operations and asset value. Environmental performance is also more easily measurable and reportable compared to social and governance factors, making it a more straightforward area for investors and stakeholders to assess. However, social responsibility and governance practices are gaining traction as investors and tenants recognize their importance in creating sustainable and resilient communities.

Environmental Performance

Environmental performance encompasses a wide range of factors, including energy efficiency, water conservation, waste management, greenhouse gas emissions, and the use of renewable energy sources. According to the USGBC, commercial building owners and managers are projected to invest an estimated $960 billion globally between now and 2023 on greening their existing built infrastructure ³. Key initiatives in this area include:

• Green Building Certifications: Pursuing certifications such as LEED (Leadership in Energy and Environmental Design) and ENERGY STAR demonstrates a commitment to sustainable building practices and can enhance a property's marketability and value.
• Energy Efficiency Retrofits: Investing in energy-efficient technologies, such as HVAC upgrades, lighting systems, and building automation, can significantly reduce energy consumption and operating costs.
• Renewable Energy Integration: Incorporating renewable energy sources, such as solar panels and geothermal systems, can reduce reliance on fossil fuels and lower carbon emissions.
• Water Conservation Measures: Implementing water-efficient fixtures, landscaping, and irrigation systems can conserve water resources and reduce operating costs.
• Waste Management Programs: Developing comprehensive waste management programs that prioritize waste reduction, recycling, and composting can minimize environmental impact.

Social Responsibility

Social responsibility focuses on a property's impact on the community and the well-being of its occupants. Key initiatives in this area include:

• Health and Wellness: Creating healthy and comfortable indoor environments with good air quality, natural light, and access to amenities that promote physical and mental well-being.
• Community Engagement: Supporting local communities through partnerships, volunteer programs, and initiatives that address social needs.
• Diversity and Inclusion: Promoting diversity and inclusion in the workplace and among tenants, creating an equitable and welcoming environment for all.
• Accessibility: Ensuring that buildings are accessible to people with disabilities, providing equal opportunities for all.
• Tenant Satisfaction: Prioritizing tenant satisfaction through responsive property management, high-quality amenities, and a focus on creating a positive tenant experience.

Governance Practices

Governance practices are essential for ensuring accountability, transparency, and ethical behavior in building operations and management. Key initiatives in this area include:

• Ethical Business Practices: Adopting a code of ethics that guides decision-making and promotes responsible business conduct.
• Transparency and Disclosure: Providing clear and accurate information about ESG performance to investors, tenants, and other stakeholders.
• Risk Management: Implementing robust risk management processes to identify and mitigate potential ESG-related risks.
• Stakeholder Engagement: Engaging with tenants, employees, investors, and community members to understand their concerns and incorporate their feedback into ESG strategies.
• Board Diversity: Promoting diversity on the board of directors to ensure a range of perspectives and experiences in decision-making.

ESG Initiatives Appealing to Commercial Property Owners and Managers

Government Incentives for ESG Initiatives

Several government incentives are available to encourage and support ESG initiatives in commercial real estate. The Inflation Reduction Act (IRA) has been instrumental in expanding these incentives, making it more financially viable for property owners to adopt sustainable practices.

• Investment Tax Credit (ITC): The ITC provides a tax credit for installing designated renewable energy generation equipment, including solar, geothermal, wind, and other renewable energy technologies ¹. The IRA has increased the ITC cap to 70% of project costs, up from 26% ².
• Commercial Buildings Energy-Efficiency Tax Deduction (179D): The 179D deduction offers tax deductions for builders who create energy-efficient commercial buildings ¹. The IRA has increased the 179D ceiling from $1.88 to $5 per square foot ². This deduction is now also available to tax-exempt organizations, expanding its reach and impact ⁶.
• Production Tax Credit (PTC): The PTC provides a tax credit for each kilowatt-hour (kWh) of electricity generated by specific types of wind, hydropower, and clean hydrogen renewable energy projects ¹. The IRA offers up to $30 per MWh of clean energy generated through the PTC ².
• Section 45L Tax Credit: This tax credit provides a monetary value on energy efficiency in building development ⁷.
• Historic Tax Credit (HTC): The HTC is designed to support the revitalization of communities by providing a 20% tax credit for eligible building rehabilitation expenditures ¹.

These incentives can be leveraged by commercial property owners to finance ESG projects, reduce operating costs, and enhance the value of their assets. For example, the ITC can be used to offset the cost of installing solar panels, while the 179D deduction can incentivize the construction of energy-efficient buildings.

Examples of Local Independent ESG Companies

Several local independent companies in the United States are focused on providing ESG solutions for commercial real estate. Here are a few examples:

• ESG Analytics: This company offers a range of ESG data and analytics services, including ESG risk ratings, carbon footprint analysis, and sustainability reporting. They cover over 20,000 companies and provide real-time data, enabling clients to make informed decisions about ESG investments and operations ⁸.
• Allbirds: This footwear and apparel company demonstrates a strong commitment to sustainability through its environmentally friendly materials, carbon-neutral operations, and transparent supply chain. They have engaged Sustainalytics, an independent ESG assessment provider, to assess their ESG performance and have received a "low risk" rating ⁹.
• PerkinElmer: This global corporation provides a variety of solutions in the healthcare and life sciences sectors, with a focus on sustainability and social responsibility. They have implemented initiatives such as reducing greenhouse gas emissions, promoting diversity and inclusion, and engaging in ethical business practices ¹⁰.

These companies exemplify the growing number of local independent businesses that are driving ESG adoption in the commercial real estate sector.

Connecting Local Independent Companies with Commercial Property Owners

To effectively connect local independent companies with commercial property owners and managers, consider the following strategies:

• Create a Database: Develop a comprehensive database of local independent companies and their ESG capabilities, highlighting their expertise in areas such as energy efficiency retrofits, renewable energy installations, green building certifications, and sustainable building materials.
• Host Events: Organize events that bring together local independent companies and commercial property owners and managers, providing opportunities for networking, knowledge sharing, and potential partnerships. This could include workshops on specific ESG topics, networking sessions focused on sustainable building practices, or online platforms that connect companies with property owners.
• Develop a Marketing Campaign: Create a targeted marketing campaign to promote the benefits of working with local independent companies on ESG initiatives, emphasizing their ability to provide customized solutions, local expertise, and competitive pricing. This could involve targeted advertising in industry publications, content marketing that highlights successful ESG projects, or partnerships with industry associations to reach a wider audience.
• Offer Educational Resources: Provide educational resources to commercial property owners and managers on the latest ESG trends, best practices, and available incentives, helping them make informed decisions about their sustainability strategies. This could include webinars, white papers, or online guides that explain the benefits of different ESG initiatives and how to implement them effectively.
• Facilitate Partnerships: Act as a liaison between local independent companies and commercial property owners, facilitating partnerships that align with their respective ESG goals and objectives. This could involve matchmaking services that connect companies with property owners based on their specific needs and expertise, or providing support in negotiating contracts and developing collaborative projects.

Conclusion

The commercial real estate sector in the United States is undergoing a significant transformation as ESG considerations take center stage. By understanding the key drivers, relative importance of ESG pillars, and the most appealing initiatives, local independent companies can effectively engage with commercial property owners and managers to drive sustainable building practices and create a more resilient and responsible built environment. The growing job opportunities in the ESG space within the commercial real estate sector further highlight the potential for career growth and professional development in this field ¹¹. Looking ahead, the future of ESG in commercial real estate is likely to be shaped by the increasing role of technology, the growing importance of social responsibility, and the potential for greater standardization and transparency in ESG reporting. As the industry continues to evolve, collaboration and innovation will be essential to achieving a truly sustainable built environment.

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