Inherent Hurdles to ESG Compliance in Real Estate

For fund shops, no day goes by without mentioning Environmental, Social or Governance (ESG), regardless of the asset class in question. In the real estate sector in particular, ESG has been highlighted as a top concern, especially given the recent interest in climate disclosure by the Securities and Exchange Commission (SEC) and the various ESG reporting proposals on the horizon. , the trend is increasing.

ESG is difficult to identify, especially from a U.S. regulatory and compliance perspective, across a range of fund types, but real estate is arguably one of the more challenging industries on the list. From social considerations such as the mental health of office space tenants to downstream manufacturing reports for construction materials, the real estate sector faces major hurdles when it comes to his ESG implementation and proper reporting.

Why real estate struggles with ESG

It is important to understand why ESG is a fundamental aspect of the investment management sector. While the SEC and other regulatory bodies are still struggling to implement certain of his ESG regulations and rules, investors of all shapes and sizes want to make sure that the companies they invest in and their environmental, social and They are demanding more transparency about their governance policies. requires companies to rigorously assess their ability to report on their ESG compliance practices, but in the absence of a standardized framework investment managers find You need to identify the data that is

The main challenge is the fact that there are many factors that investors may look at when it comes to ESG. For environmental criteria, greenhouse gas and carbon emissions are the top areas of analysis. However, there are many other factors to consider when it comes to ESG in real estate. Social issues such as building safety and quality are top priorities, but small things like energy-saving light bulbs should also be considered. Real estate is a unique area across investment management that requires a very broad perspective, from the building itself, to the pipeline of materials used in the building, to how the building is maintained. All of these factors create a huge checklist for ESG compliance and are part of why the real estate investment firm is struggling to keep up with his ESG transparency demands from investors.

Put “S” and “G” in ESG

Among the ESG categories, environmental factors have received the most attention across sectors. However, for real estate in particular, the social and governance aspects of ESG strategies are rather unique, offering a set of challenges not yet faced by other industries.

The first ESG issue that comes to mind for real estate is greenhouse gas emissions, such as the amount of energy a building uses. But the social dimension of real estate portfolios is also pressing. This may include questions such as: Is the building safe in terms of toxicity, including mold? Is the building functioning properly and is it safe for residents? There are also mental health issues. Dimmed lighting may mean less power grid usage, but if the building is used as an office building, what are the effects of dim lighting on individuals in the work environment?

Similarly, there are real estate-specific factors that are often overlooked from a governance perspective. From an investor’s perspective, it is important to consider management’s assessment, including scrutinizing whether these teams comply with all local regulations. Governance also includes the quality of building management.

Combined, social and governance within real estate delineate the community surrounding the building. This depends on whether there is community involvement, how management works to support the community, and how those factors translate into her ESG considerations of the investor. raise an issue.

All of these social and governance factors are difficult to report on, and without a standardized framework of requirements, individual buildings will meet the needs of their tenants and what companies want from their ESG reports. must be specified.

The role of technology in ESG reporting

While there is no one-size-fits-all solution to ESG issues in the real estate sector, it is clear that the sheer volume of data that needs to be captured for ESG record-keeping will continue to drive the sector’s reliance on technology.

For real estate companies that need to organize reports for investors and board members, it is important to have a centralized technology platform to monitor, analyze and deliver reports on ESG metrics. A real estate company with ESG requirements needs to acquire vast amounts of data and distill it into records and reports to outline his ESG policy in action.

what’s next?

The SEC is gearing up for more climate disclosures and ESG proposals, encouraging the real estate investment sector to sit down and use data appropriately to prove ESG policies that meet investor needs. It is clear that it must be done. Regulators determine the details about the information these regulatory reports require, but real estate funds rely on technology infrastructure and compliance teams to handle the amount of data these reports require. need to strengthen. While changes to certain his ESG requirements will certainly occur, the need for technology and data management capabilities has been identified.

Libby Toudouze is the Managing Director of IQ-EQ. IQ-EQ helps global investors focus on investing and preserving their capital in a sustainable and compliant manner.

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