Commercial Real Estate’s Sustainability Goals Have a Glaring Blind Spot
When investing for the long term, a company’s success depends on what the company does for the environment, how it interacts with society and how it is managed. The investment world has reduced this idea to three letters: ESG. They stand for Environmental, Social, and Governance and now stand for priorities that make a company sustainable and resilient in the long term. The popularity of this type of investment has grown in many areas of the commercial real estate industry in recent years. Everyone from developers, owners, operators and private equity firms has rushed to make loud proclamations about their newfound commitment to sustainable and equitable business models. Once seen as a fringe strategy, investors have increasingly demanded that their money not only continue to generate significant returns, but also play a role in alleviating the climate crisis and other societal ills.
While real estate owners large and small have made bold promises about reducing carbon emissions, diversifying boards and other initiatives, many have only recently begun sharing details on how they plan to achieve these goals. It is only now that we are seeing both concrete plans to achieve these often lofty goals, as well as the reporting methods they will use to measure their progress. These early returns show that there is much reason for encouragement, but also raise significant concerns about whether these measures, which are focused almost exclusively at the real estate level, will ever have a meaningful impact beyond the sum of their various parts.
In fairness, there are many positives to the real estate industry’s shift toward sustainability. Institutional investors like Ivanhoe Cambridge and Norway’s Sovereign Wealth Fund are among dozens of key players who have committed to implementing aggressive net-zero carbon emissions policies in their portfolios over the coming decades. Major owners and operators such as Oxford Properties now regularly report on the ESG impact of their activities, describing annually how they have improved and what they intend to do in the future to improve even further.
Builders have also shown considerable and rapidly growing interest in sustainable building practices in recent years. The US Green Building Council reported that green, LEED-certified homes grew 19 percent between 2017 and 2019, reaching an all-time high of nearly 500,000 LEED-certified single-family, multi-family and affordable housing units around the world. (More than 400,000 of these were in the United States.)
A separate report showed that more real estate developers are embracing green projects and becoming fully committed green builders. For example, in the United States, the percentage of single-family home builders who focused almost exclusively on green projects was 19 percent in 2017 and is projected to reach 31 percent by 2022, rising from 23 percent in 2014 to 36 percent in 2017 and is projected will be a whopping 47 percent by 2022. Even more encouraging is that multifamily developers who are greening more than 90 percent of their projects are projected to increase from 29 percent in 2017 to 40 percent in 2022.
However, this holistic approach has not yet caught on with ESG initiatives. The vast majority of measures to make real estate more sustainable focus exclusively on the building level, but ignore the diverse effects of their developments on the climate-relevant behavior of residents.
In fact, all of these seemingly well-intentioned activities suffer from a major blind spot that, if left unaddressed, threatens to render them largely irrelevant.
The most glaring problem with all of these seemingly well-intentioned initiatives is the transportation patterns of building occupants (residents, employees, buyers and others) are virtually ignored. This is particularly problematic as transport-related impacts, particularly greenhouse gas emissions, outweigh those caused by in-building energy systems – with the latter receiving far more attention. Take Ivanhoe Cambridge’s recently published path to net-zero carbon by 2040. The company pushes the limits when it comes to implementing sustainability in its real estate investment decisions.
Ivanhoe’s journey to net zero commits to a variety of initiatives to reduce its portfolio’s carbon footprint, including dramatic improvements in building energy efficiency, increasing real estate’s reliance on renewable energy sources, improving the use of more sustainable building materials and more. However, it does not document or commit to reducing the massive downstream carbon footprint caused by residents’ and tenants’ transportation patterns.
Tricon Residential provides another example. Tricon owns approximately $8 billion of residential properties in the United States and Canada and is particularly active in the rental market, including single family home rentals. In its 2020 ESG Roadmap, Tricon reported on performance across a range of environmental and social factors, but virtually ignored the critical issue of how residents get to and from their homes to work, play, shop, school to go etc. Tricon’s report points to sustainable building materials and efficient energy systems, but has little to say about how their construction and operational practices make certain types of transportation options more likely than others.
These omissions could easily be written off by some, the impact of transportation is ultimately the responsibility of residents, not investors or developers. But the reporting practices of Ivanhoe Cambridge, Tricon and others in the industry already make it clear that they also consider other environmental concerns raised by occupants to be within the landlord’s purview. Real estate investors and developers in particular are dedicated to improving the efficiency of energy systems in buildings, although these emissions are ultimately caused by the daily actions of occupants.
Transportation-related emissions are similarly generated by occupants, but vary significantly based on developer and investor decisions. They play an important role in choosing the location of their development, their design, and outfitting their buildings with large swathes of on-site parking, electric vehicle stations, and other features to either incentivize or discourage the use of traditional gas-powered vehicles , which are among the largest single sources of harmful greenhouse gases.
As an urban planner, I am very aware of how development affects broad human behavior patterns. This is particularly true of the way people travel as part of their daily lives – as evidenced by the massive emphasis and resources that have been placed over the last two decades on providing access to public transport and creating walkable neighborhoods. However, these factors are conspicuously absent from ESG plans and subsequent reporting, and the real estate industry as a whole has yet to fully absorb the role that transportation is playing in this dynamic.
The rise of ESG-related goals in commercial real estate is undeniably positive as the pursuit of profit without regard to the wider impact has created a multitude of problems for society. But by ignoring the way developments shape transportation patterns, the industry risks falling into an endless cycle of trying to solve problems that at the same time fuel them further.
If we want to achieve truly lasting impact from a long-term investment, commercial real estate companies need to start considering the full impact of their products. This can only be achieved by thinking beyond the building level when not only assessing sustainability factors but also their overall responsibilities to their communities. Helping shape more sustainable transport patterns would be a useful first step towards a more holistic approach to real estate. Making our buildings safer, cleaner, and healthier can truly change our cities and our world for the better. I call that a good investment.