November 15, 2021

An ESG strategy is no longer a nice-to-have, it is a necessity

Key ESG considerations for the real estate industry in Asia

 

By Henry Hsu & Shashank Gangil

 

The past two years have seen a heightened focus on environmental, social and governance (ESG) issues as unprecedented pandemic- and climate-related disruption has driven governments, corporations and communities worldwide to move toward more sustainability-based policies and practices. The key discussions and commitments emerging from COP26 serve to further underscore the critical fact that ESG and sustainability cannot – and should not – be ignored.

 

This is certainly the case in the real estate industry in Asia, where ESG is increasingly being viewed as more than a buzzword. Rather, it is starting to play a much more prominent role in how businesses operate as a growing number of investors and occupiers seek to embed ESG considerations into every stage of the real estate lifecycle.

 

CBRE’s Asia Pacific Global Investor Intentions Survey 2021 found that nearly half of the surveyed investors in the region stated that they have already adopted ESG criteria as part of their investment strategies, representing a significantly stronger focus on ESG issues than in 2020 (Figure 1).1

 

Figure 1: To what extent do you plan to adopt ESG criteria into your investment strategy?

APAC-ESG-Sustaiainability-Article-Figure-1

 

To this end, we continue to see a number of key ESG trends and developments in Asia that have taken hold this year and that will continue to shape the landscape for real estate investors and occupiers in 2022.

 

A drive to implement net-zero strategies

 

We are seeing increasing demand for building owners and tenants to reduce their carbon footprint, with many in the industry aiming to develop and implement net-zero carbon strategies. In many cases, the targets set out in these strategies are aligned with where organisations’ core operations are based; for example, aligning with Hong Kong’s Climate Action Plan 2050 or Singapore’s 2030 Climate Action Plan.

 

There is also greater discussion around whether to pursue a strategy tied to a net-zero carbon emissions target or to carbon neutrality, with the latter focused primarily on carbon offsetting initiatives. In our view, a shift toward a net-zero carbon emissions strategy is the way forward. In September, CBRE announced its commitment to achieve net zero carbon emissions by 2040, targeting a significant reduction in carbon emissions from both its own operations and the properties it manages for investors and occupiers.2 This commitment positions us well to guide our clients along their journey to minimise their footprint, maximise their sustainability potential, and shape their roadmap for the future.

 

Of course, while strategies may differ depending on the nature and industry of the business, the key ambition for organisations in implementing a decarbonisation roadmap or sustainability strategy should be to set realistic targets, minimise base consumption and explore renewable energy alternatives where possible. A robust strategy should encompass considerations not just at the property or asset level but also at the portfolio level across different regions to ensure accuracy, consistency and effectiveness.

 

Spotlight on building environmental performance

 

Over the past two years, we have seen an uptick in interest in measuring and evaluating a building’s environmental performance. While property certifications such as LEED and BREEAM have been around for some time, they are now not just becoming a norm, they are also becoming part of a minimum requirement for building development and operation in many jurisdictions.

 

Furthermore, “green leases” between landlords and tenants to meet certain environmental objectives will become a more common tool for investors to monitor and drive the environmental performance of their real estate assets.

 

There are already examples in Asia of owners and operators driving significant positive changes with green leases and technology. For instance, the City Square Mall in Singapore had all tenants agree to adopt green practices within its premises. The mall has auto-lighting on escalators and in car parks, saving more than 50,000 kilowatt hours of electricity per year. High-efficiency air conditioners and Variable Air Volume technology help moderate the mall’s temperature, saving energy and limiting emissions. In addition, following the installation of new energy-saving technologies in 2020, annual energy consumption of Keppel Bay Tower in Singapore was half that of the typical office building in the city-state.3

 

There are also opportunities related to in-house renewable energy generation. For example, we have seen the positive development of the Feed-in Tariff Scheme in Hong Kong, which provides incentives to building owners and the private sector more broadly to install on-premises solar photovoltaic (PV) or wind systems, where the renewable energy generated can be sold to utilities companies at a rate that is higher than the normal electricity tariff rate. We expect to see more similar initiatives implemented across Asia and increased interest from the private sector in this area, especially in locations such as Hong Kong where the large number of industrial buildings with unutilised rooftop space presents a significant opportunity.

 

A greater focus on embodied carbon emissions?

 

In our view, much of the discussion around environmental sustainability in buildings in Asia has tended to focus primarily on operational carbon emission. According to the World Green Building Council, buildings are currently responsible for 39% of global energy related carbon emissions. While 28% of these emissions are generated from energy needed to heat, cool and power them (operational carbon), the remaining 11% is from materials and construction (embodied carbon).4 A focus on reducing both types of carbon is essential as building stock continues to grow around the world and embodied carbon becomes a larger factor.

 

While these are still relatively early days, the conversation is starting to evolve and take hold in the region, and we expect to see more real estate developers seek to reduce embodied carbon emissions related to the construction of new buildings. This is aided by the fact that viable alternatives to concrete and steel, such as timber, are becoming more readily available. In 2019, Lendlease completed the development of International House, a six-storey timber office building in Sydney, now anchored by Accenture.

 

Health and wellness coming to the fore

 

As the workforce starts to return to the office across Asia on the back of a regional economic recovery and rising vaccination rates, another area of focus for both occupiers and landlords will be on enhancing the wellness and sustainability features of their properties to ensure they continue to attract and retain tenants, and their employees.

 

The implementation of a comprehensive ESG strategy will also feature a greater focus on wellness, and the health and safety of the workplace. We are seeing a marked increase in WELL Building Standard certifications, as one outcome of the COVID-19 pandemic has led to greater demand for occupiers to provide workplace wellness features such as proper air ventilation and filtration, and enhanced hygiene practices. The proper consideration and provision of workplace safety, health and wellness will not only serve a positive social purpose, but it will increasingly be viewed as a key competitive advantage for both landlords and occupiers.

 

Opportunities abound throughout the real estate lifecycle

 

It is clear that interest in – and understanding of – ESG and sustainability is growing in Asia, with a number of building owners, tenants and other stakeholders in the real estate industry seeking to implement sustainability strategies and embed ESG considerations across their business. Crucial to an ESG or sustainability strategy’s success will be a mindset shift away from viewing it as a tick-box exercise, and toward applying true intent and purpose behind an organisation’s ESG ambitions. To this end, the real estate industry in Asia has certainly progressed significantly compared to a decade ago, but there is still room for development. Further support and incentives from governments and the private sector would go a long way in encouraging the industry to integrate ESG across their business in order to achieve both financial and environmental efficiencies, and fulfil its social obligations.

 

With ESG now playing a much more prominent role in how companies operate, there are significant opportunities for investors and occupiers to progress their ESG goals across the real estate lifecycle. From the early stages of formulating a sustainability or net-zero carbon strategy, creating a decarbonisation roadmap, through to implementation, measurement and reporting on portfolio performance and corporate sustainability reports, there are opportunities on offer at every step of the journey.



[1] https://apacresearch.cbre.com/research-and-reports/Asia-Pacific-Investor-Intentions-Survey--2021

[2] https://www.cbre.com/press-releases/cbre-commits-to-net-zero-by-2040

[3] https://www.cbre.com/insights/reports/esg-and-real-estate-the-top-10-things-investors-need-to-know

[4] https://www.cbre.com/insights/reports/global-corporate-real-estates-role-in-the-esg-agenda-2021

 

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