Top 6 ESG Trends To Be Aware Of:

As the commercial real estate industry evolves, Environmental, Social, and Governance (ESG) considerations have become a vital aspect of pre-acquisition due diligence. ESG risks and opportunities have a significant impact on the financial performance and market value of real estate assets in today’s market. We have observed six major ESG trends in the commercial real estate space as we work with our clients to incorporate ESG into the due diligence process, whether for assessing an asset or evaluating existing assets. Understanding these trends not only improves ESG practices, but also positions owners and investors for success in the ever-changing world of sustainability. These trends will give you a better understanding of the ESG drivers that are shaping the industry, as well as the steps you can take to improve the sustainability and resilience of your assets and operations.

Trend #1: Maximizing Energy Efficiency

Energy is a critical aspect of pre-acquisition due diligence in commercial real estate, as it has a direct impact on the financial health and market value of real estate assets. ESG considerations related to energy typically encompass the use of HVAC systems, windows, roofs, lighting, sensors, monitors, controls, appliances, and overall energy use. The latest energy-efficient technologies and systems aim to reduce energy consumption and improve the overall energy performance of a building. For instance, a building management system (BMS) is designed to integrate all the technical systems of a building, such as heating, ventilation, air conditioning, lighting, and security, to provide optimal energy efficiency and a comfortable environment for occupants. One of the main benefits of a BMS is that it allows building owners and investors to monitor and control all building systems from a central location. This centralized control helps minimize energy waste and ensures that all systems are functioning at optimal levels, which leads to reduced energy consumption and lower energy bills. A BMS can provide real-time data on energy usage and occupancy, which can be used to make informed decisions about energy-saving measures and optimize energy management practices. By integrating the various systems, a BMS can ensure that all systems work together harmoniously and efficiently, reducing the need for manual adjustments and improving overall building performance.

Another important technology in the energy-efficient space is the use of smart appliances and controls. These systems can detect and respond to changes in energy usage patterns and can be remotely managed and monitored. This can result in reduced energy consumption, lower energy bills, and improved sustainability. Smart appliances are becoming increasingly important as building owners and investors seek to meet energy-saving goals and comply with regulations, and will likely continue to play a significant role in the energy-efficient space in the years to come.

Trend #2: Staying Ahead of the Game with Safety, Health, and Wellness In ESG

When it comes to ESG considerations in commercial real estate, safety, health, and wellness play a critical role. A key aspect of pre-acquisition due diligence is ensuring that a building is structurally sound and free from any risks that could negatively impact the health and wellbeing of its occupants. This includes evaluating the presence of hazardous building materials such as asbestos, lead, radon, and mold, as well as assessing the effectiveness of life safety systems and the existence of an emergency preparedness plan. One of the key challenges in this area is identifying potential safety, health, and wellness risks that may not be immediately obvious. This is why it is essential to conduct comprehensive assessments that incorporate the latest technologies and systems, such as indoor air quality monitoring, to ensure a building is safe and healthy. Investing in the health and safety of a building’s occupants is not just an ethical obligation, it is also a key factor in ensuring ESG compliance and sustainability. The long-term success of a building depends on the wellbeing of its occupants, and this must be considered when conducting due diligence and assessing the ESG performance of a property. By incorporating assessments and technologies that focus on safety, health, and wellness, commercial real estate investors and lenders can ensure that their assets are not only ESG-compliant, but also positioned for long-term success.

Trend #3: Best ESG Practices for Reducing Greenhouse Gas Emissions

The role of commercial real estate in addressing environmental concerns is rapidly growing as owners and investors seek to minimize the carbon footprint and impact of their assets. One critical aspect of this effort is reducing greenhouse gas emissions. To achieve this goal, many are turning to a key trend in the industry – setting net zero goals. The adoption of these goals signifies a commitment to creating a more sustainable future, as well as fulfilling ESG compliance requirements. Energy ordinances and regulations are pushing the industry towards reducing emissions, highlighting the importance of net zero goals. Net zero involves reducing energy consumption and increasing energy efficiency to minimize the amount of greenhouse gas emissions produced by a building. This can be achieved through a combination of measures, such as implementing energy-efficient technologies, incorporating renewable energy sources, and improving a buildings envelope to reduce heat loss.

To support net zero, there are a range of programs and systems available, including EnergyStar score, green building certifications, energy audits, and retrocommissioning. EnergyStar score is a benchmarking tool that helps building owners and operators measure and track the energy performance of their properties, identify areas for improvement, and prioritize energy-saving investments. Green building certifications, such as LEED and BREEAM, provide a framework for designing, building, and operating high-performing, sustainable buildings. Energy audits assess the energy performance of a building and provide recommendations for improving energy efficiency, while retrocommissioning involves optimizing the existing systems in a building to reduce energy consumption and improve overall performance. Reducing greenhouse gas emissions is essential for both ESG compliance and overall sustainability, making it a key focus for any commercial real estate asset. By incorporating assessments and the latest technologies and systems into pre-acquisition due diligence, commercial real estate owners and investors can ensure that they are making informed decisions and reducing the environmental impact of their assets.

Trend #4: Mitigating Climate Risk

The increasing focus on ESG considerations in commercial real estate has brought a heightened attention to the issue of climate risk. To effectively assess the potential impacts of climate-related natural hazards on a property, it is crucial to conduct natural hazards and climate resiliency assessments. These assessments should consider the various types of natural hazards that may affect the property, such as flooding, sea-level rise, hurricanes, wildfires, and more. Additionally, resiliency measures must be evaluated and implemented to protect against these hazards and reduce the potential for damage. Resiliency measures for climate risks in the commercial real estate space typically include various steps that help a building or asset withstand the impact of extreme weather events, such as hurricanes, floods, heatwaves, and other natural disasters. These measures may include structural upgrades, such as reinforcing the roof and walls to resist wind damage or installing waterproofing systems to prevent water damage. In addition to physical improvements, resiliency measures may also include the implementation of emergency plans, such as evacuation procedures and emergency backup power systems. Other common resiliency measures include:

Installing green infrastructure, such as green roofs or permeable pavements, to reduce runoff and help mitigate the impact of heavy rain events.
Upgrading or replacing aging HVAC systems to ensure continued operation during power outages and extreme weather events.
Improving the insulation and sealing of the building envelope to reduce energy consumption and improve indoor air quality.

Each commercial real estate property is unique and may require different resiliency measures to effectively mitigate climate risks. By working with a team of experts, such as AEI, you can ensure that you have a comprehensive plan in place to minimize the impact of climate-related events on your assets.

Trend #5: Integrating ESG Renewable Energy Strategies

Renewable energy is a major trend in the commercial real estate industry as it relates to ESG considerations. With the increasing focus on reducing greenhouse gas emissions and improving sustainability, commercial real estate owners and managers are looking to incorporate renewable energy sources into their operations. Solar, fuel cells, battery storage, and electric vehicle (EV) charging infrastructure are just a few of the renewable energy technologies being adopted in the commercial real estate space. These technologies not only help to reduce the carbon footprint of the assets but also provide the opportunity to generate revenue through the sale of excess energy back to the grid. When assessing renewable energy systems in commercial real estate, it is important to consider the following factors:

Technical feasibility: The viability of renewable energy systems in a given building or portfolio depends on several factors, such as the availability of sunlight or wind, the existing electrical infrastructure, and the specific requirements of the building or portfolio.
Financial viability: The cost of renewable energy systems and their expected return on investment must be carefully considered in order to ensure that the investment is economically sound. This includes the costs of installation, operation, and maintenance, as well as the benefits of reduced energy costs, tax incentives, and other financial benefits.
Energy production and storage: Renewable energy systems must be designed to meet the energy requirements of the building or portfolio, considering the expected energy demand and the storage capabilities of the systems. This is particularly important for systems that rely on energy storage, such as fuel cells or battery storage systems, as these systems must be able to store energy for use when it is needed.

Incorporating renewable energy into ESG strategies is essential to position commercial real estate assets for success in the rapidly evolving world of sustainability. By enhancing the energy efficiency and reducing the carbon footprint of assets, renewable energy systems can help real estate owners and investors to improve the financial performance of their assets and meet their ESG goals. Additionally, by keeping up to date with the latest renewable energy technologies and systems, commercial real estate owners and investors can be well-positioned to capitalize on the opportunities presented by the growing renewable energy sector.

Trend #6: Building Environmental Resilience and Sustainability

As ESG continues to gain prominence in the commercial real estate industry, pre-acquisition due diligence must take into account a range of environmental risks and opportunities. One of the most pressing concerns is the efficient use of water and management of stormwater. Many commercial real estate buildings have large amounts of impervious surfaces that can cause significant runoff during heavy rain events. To mitigate this risk, property owners and investors must implement effective stormwater management practices, such as installing green roofs, permeable paving, or retention ponds. Another important environmental concern is contamination and hazardous waste. When conducting ESG due diligence, it’s essential to assess the presence of hazardous substances and potential for contamination, especially in properties with a history of industrial use. A thorough understanding of the site’s history and the potential for environmental hazards can help identify and mitigate risks and ensure compliance with environmental regulations.

Bottom Line on ESG Latest Trends:

ESG in commercial real estate is constantly evolving and it’s crucial to stay up to date with the latest trends and best practices in order to ensure ESG compliance and improve the sustainability and resilience of assets. The six ESG trends outlined above provide a comprehensive overview of the ESG considerations that are driving the industry forward and highlights the importance of incorporating ESG into the pre-acquisition due diligence process. By understanding and prioritizing these ESG trends, investors and lenders can position themselves for success in a rapidly evolving world of sustainability.

With AEI’s help real estate owners and lenders can make informed decisions and ensure ESG compliance and continued achievement of ESG goals and oversite of climate mitigation projects. Remember, if you have any questions or concerns, don’t hesitate to reach out to one of our experts at AEI. We are here to help you navigate the process and make sure you have the best ESG strategies in place to meet regulations and goals. Reach out to speak with one of our consultants today.

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