By Hamlin Lovell, NordicInvestor

ESG has probably been most extensively applied to investing in publicly listed equities but it can of course apply to any asset class. Real estate is an area where asset owners have more power and control to ensure strong ESG policies, which may also lower operating costs – and attract higher sales prices, rental rates and occupancy rates – thus producing a “win-win” situation.

Denmark’s largest pension fund, ATP, has just appointed Peter Bruun as Head of ESG for its real estate unit. The fund has DKK 47.8 billion, or about 5% of its DKK 837.5 billion assets, invested in real estate and the need for an individual exclusively responsible for real estate ESG illustrates the importance.

E- Environmental

Buildings are the largest single source of energy and water usage – making up 40% of global energy consumption and 33% of global carbon emissions – so the most obvious policies concern energy efficiency through heating based on renewables; insulation, and efficient LED lighting, all guided by emission reduction targets.

Europe is probably leading the way in ESG. The EU Energy Performance of Buildings Directive requires Energy Performance Certificates (EPCs) in all advertisements for selling or renting buildings. Though the UK is, sadly, trying to leave the EU, the UK Energy Act 2011 has set minimum energy efficiency standards (equivalent to an ‘E’ rating under the EPC) for renting out a residential or business building.

Other regions also have certifications, such as the US American LEED (Leadership in Energy and Environmental Design); the Australian NABERS (National Australia Built Environmental Rating System); the Singapore Green Mark Program; and the Tokyo Green Building Program.

Environmental measures can look at issues such as:

  • Building materials
  • Indoor Air Quality and GHG Emissions
  • Energy and Water Management
  • Waste and Wastewater Management
  • Waste and Hazardous Materials Management
  • Treatment of contaminated land
  • Indoor environmental quality
  • Outdoor environmental quality and biodiversity
  • Ecological Impacts


Environmental risks also pose a palpable threat to real estate. It is generally accepted that climate change increases the incidence of extreme weather events such as hurricanes, typhoons, inland floods, coastal floods and increased sea levels, all of which can cause permanent damage to buildings. Separately from climate change, hydraulic fracturing or “fracking” of oil and gas has been associated with increased earthquake risk.

Therefore, real estate investors have a wider interest in encouraging governments to control climate change, and some methods of fossil fuel extraction, and thereby reduce the occurrence of such extreme events, over the long term.

In the short term, if climate change is not adequately controlled, radical changes to construction practices might be needed to make buildings more resilient to natural disasters. In Japan for instance, all new buildings are supposed to be earthquake resistant.

S -Social

Social considerations around real estate include both the treatment of construction workers, and the impact on wider communities. Working conditions focus on health, safety and security issues.

Construction also has wider importance in terms of the megatrend of mass urbanization seen in most developing countries. Resettlement of indigenous communities is a highly sensitive issue in many developing countries, where the S will often overlap with E in cases where natural habitats such as rainforests are being chopped down to make way for new construction.

G – Governance

The governance aspect of real estate is in theory similar to other countries but some issues seem to crop up more often. The fact that construction contracts are some of the largest items of public spending creates potential for bribery and corruption, seen recently in the Odebrecht scandals in many South American countries. Where real estate is invested in through a fund structure, then standard fund governance considerations should be heeded.

Financial Performance: Green Premia and Brown Discounts

Good ESG policies can go hand in hand with superior financial performance. A paper from Allianz reviewed seven studies examining residential and office properties in the UK, US, Singapore, Japan, Netherlands and Australia.

It noted that five of them found positive sales premia for green properties. Where the results were mixed, the range was still biased towards the upside: for instance, one study found sales premia ranging from minus 5% to plus 17% and another from minus 1% to plus 9%. Three of the studies also found that green properties command higher rents.

Additionally, buildings constructed in line with green guidelines tend to have lower operating costs, party due to their superior energy efficiency. The main benefits of green buildings include reduced energy costs from heating, cooling, ventilation, lighting and reduced water consumption.

The only drawback is that it does generally cost more to build green buildings in the first place, but this could be recovered very quickly through higher sales prices and rents. And the cost premium is coming down as the construction industry adapts to meet the demand for green buildings.

Appendix: Industry organisations

Specialist industry groups may be able to help with the unique features of real estate ESG. The growing number of acronyms are an “alphabet soup”, but do provide some useful frameworks and ideas for developing Key Performance Indicators (KPIs) to monitor sustainability in real estate investing. We highlight a handful below but are not specifically endorsing any of them; there could be other reporting methodologies and the whole area is evolving.

INREV Sustainability Reporting Guidelines provide a reporting template that should be populated at least annually, and ideally quarterly. Some of the INREV reporting fields are also mapped against those from GRESB, GRI, EPRA and UN-PRI. Indeed, it seems that some asset managers and owners may have to carry out reports using multiple templates and formats to meet specific client requests.

Global Reporting Initiative Construction and Real Estate Sector Supplement (GRI CRESS) covers mainly E and S issues, and provides a ranking for policies.

Better Buildings Partnership’s Real Estate Environmental Benchmark is focused on environmental performance of commercial property in the UK.

IPD’s EcoPAS Measurement Service flags up environmental risks in real estate portfolios.

GRESB (the Global Real Estate Sustainability Benchmark) benchmarks the ESG performance of real assets including real estate, infrastructure and resources, and has attracted a strong following: its website says “In 2018 GRESB assessed 903 real estate funds and property companies, 75 infrastructure funds, 280 infrastructure assets and 25 debt portfolios”. Its institutional investors members represent $22 trillion of assets, and include a number of large pension funds in the Nordic region: Norges Investment Management, Formues-Forvaltning and Opplysningsvesenetsfond in Norway; ATP and Pension Danmark  in Denmark; and SEB and the AP funds in Sweden; as well as private sector asset managers such as Kungsleden, Skandia, Skanska and Vasakronan in Sweden. Asset operator and company members include Denmark’s Orsted, which generates electricity using an increasing share of wind-power, and has seen strong share price performance in recent years.

The Sustainable Accounting Standards Board (SASB) has produced a framework for analyzing ESG in for infrastructure, which includes real estate.