Note: This article is adapted from an interview with Joe Consolo, Yardi’s industry principal for energy, that was published in PERE magazine.
“ESG [environmental, social and governance] performance is becoming a key concern and differentiator for many real estate players,” PwC and the Urban Land Institute declared in their joint Emerging Trends in Real Estate survey report in 2022. Establishing ESG priorities to meet changing compliance and investor expectations complicates the already complex business of property management – but in today’s environment, property owners need to avoid the consequences of ESG obsolescence that can alienate investors and tenants and invite regulatory penalties. That’s why enhancing ESG performance with improved operations, technology and tenant behavior is critical to sustaining asset value.
Obsolescence risks investor hesitancy
Back when ESG factors weighed less heavily on property management, buildings become obsolescent because their design or amenities become outdated, causing the properties to lose market value. External factors such as the location or local job loss often also came into play.
But in this era, failure to comply with energy efficiency standards and other ESG standards rank among the key drivers of property obsolescence – and real estate investment decisions. With laws governing environmental and construction standards “only becoming more stringent, there is a significant risk for the future if you barely meet those standards today,” Consolo says.
Tech bolsters compliance
Fortunately, property managers can undertake a number of initiatives to prevent ESG obsolescence and maintain attractiveness to investors and tenants. They include such relatively simple sustainable processes as encouraging tenants to recycle and switch off their lights at day’s end. Preventative equipment maintenance, such as changing filters, upgraded air handlers and other equipment and dealing promptly with equipment failure, also helps maintain peak ESG performance.
Other actions that shore up ESG performance, such as monitoring building energy performance, require advanced software solutions capable of amassing and aggregating whole-building data. This functionality delivers visibility into energy consumption and helps create a roadmap for instituting ongoing operational improvements.
Such software “can help you operate more effectively or alert you when it is not operating efficiently. It could be as simple as detecting faults or smart devices that can control equipment centrally,” Consolo observes, presenting a positive portrayal of ESG performance to investors and tenants who have “a deeper understanding of the impact of the building on the environment” than in previous eras.
Open Standards Consortium for Real Estate (OSCRE), which standardizes data formats to facilitate electronic information exchange in the real estate industry, offers some recommendations for assessing an organization’s ESG readiness and compliance with local, state and federal requirements. They include:
- Putting the right ESG-focused people and resources in place.
- Establishing a baseline on your current status.
- Setting measurable targets for meeting ESG goals.
- Embedding ESG into the due diligence required to evaluate the ESG impact of a portfolio acquisition or disposition.
- Acquiring the right tools to gather and validate data to track progress and ensure compliance with reporting requirements.
Successful ESG execution and compliance is challenging, but the ability to gain visibility from whole-building data, setting clear goals and steps, and prioritizing projects means that “ESG obsolescence is avoidable,” according to Consolo. Emerging Trends adds, “By integrating strategy, transformation, operations and reporting, organizations can gain a significant advantage as the market starts to reward companies that can go beyond talking about what they are doing to show actual progress on ESG matters.”