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Global ESG Real Estate Goals - Incorporating social impacts in ESG strategies

August 16, 2021

The GRI Global ESG & Impact Investment Committee gathered C-Level real estate investors, asset owners, lenders and developers in June 2021 to put a spotlight on the S and have a closer look at the social impact of ESG strategies across the global real estate markets.

While the environmental aspect of ESG seems to be the main focus point for many real estate companies due to a regulatory crackdown on carbon emissions, the social impact is becoming a bigger headache by the minute. Investors and developers are seeing increased demand for science based social return strategies and data collection from their end investors. However, while many would agree that social impact will play a crucial role going forward and can benefit monetary returns of assets and portfolios, how to measure and report on these impacts is still unclear to most.

So what does the S in ESG actually mean? There is a wide variety of definitions for social impact, but some of the key topics to be addressed are social responsibility, creating social value for surrounding communities and the actual building, as well as health & wellness considerations. 

The link between social responsibility and social value creation is strong and usually value creation is a result of social responsibility. One example would be lenders having a social responsibility to finance social linked loans for affordable housing, which in turn creates social value across communities. On the other hand, some investors also see risk mitigation as a result of social responsibility. Staying in the realm of affordable housing, some see tenants not only stay longer but also keep up buildings for a longer period of time. 

Health & wellbeing has been pushed into the spotlight during COVID as a key area where buildings can improve tenants' health and mental wellbeing. Studies have shown that indoor space - which is where most people spent the majority of their time - is a key factor in health and aging processes. Investors and developers have taken to Wellbeing credentials for buildings and portfolios to increase their attractiveness towards potential tenants and charge premium rental incomes and higher exit returns. Especially senior housing and student housing have been key drivers in this space. 

Looking across the board at the social considerations, the main common factor is that their implementation has serious impacts on asset management and on an operational level. Many have been already speaking about real estate becoming more and more a service based industry and buildings themselves will not be enough to charge premiums and stay ahead of the competition going forward. Social impact is a perfect example of this. Investors, lenders and developers have to broaden their focus and consider their impacts on society as a whole but more importantly on a local and national level to understand how to maximise their social impact. 

The main hurdle will be to understand how to measure and benchmark social impact. In particular data protection laws are restricting the type and amount of data that companies can collect to quantify their social impact decisions, making most companies rely on anecdotal and case study evidence. Some factors are easier to track than others, such as performance of individual assets and portfolios with a focus on social return that outperform in the same location with higher leasing values, faster leases and increased tenant retention.

One asset class that can see a big impact through social impact are residential assets. With the pandemic unemployment and inequality levels have drastically increased, affordable housing is becoming more and more important to communities. While the cost of land is still the main pain point in creating affordable housing, a more adjusted risk return standpoint is crucial to be considered, as more stable tenants would benefit this positively. In assessing the actual social impact and value creation one must consider the wider community matrix with factors such as economic welfare, education and healthcare that is provided through affordable housing - however, the actual quantitative measurements are limited. 

With regards to commercial assets, it seems that choosing tenants based on their social impact on the community surrounding the asset will be a key point to consider. This could potentially also add to value creation, especially for placemaking and mixed use projects. However, this also raises questions around whether it is the role of the landlord to weigh up their potential tenants in terms of ESG considerations. Furthermore, should tenant exclusion based on their ESG compliance become a crucial criteria going forward, markets would need simple criteria to mitigate the operational heavy task of weighing up each tenant against one another.

The overall approach to the social side of ESG is still a head scratcher for most real estate professionals, however, what members were in agreement with was that a holistic approach that integrates already established efforts around the E with their S agenda. While there is still a lack of benchmarking and reporting measurements in the markets, each company is trying to understand where to put their main focus for social return and impact.

The conversation continues during our next Committee Meeting in August 2021 with a focus on benchmarking and global reporting standards for ESG in real estate.
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