The real estate sector can significantly impact the environment, as buildings consume 40% of global energy and produce 20% of greenhouse gas emissions. Investors and occupiers increasingly prioritize sustainability in their selection of property investments. Real estate investment trusts (REITs) are publicly reporting their ESG efforts. The experiment confirms that investors value environmental impact and are willing to give up a higher investment return in exchange for this impact.
Energy Efficiency
Energy efficiency improvements help property owners and investors reduce operating costs, attract tenants, and improve a building’s environmental performance. Energy efficient upgrades may include lighting, HVAC, and more than 20-40% more efficient appliances than traditional equipment, resulting in lower utility bills. These systems also require less maintenance, cutting, repair, and replacement costs. Investors who choose green properties can also market them as healthy, speeding up sales or rentals. Many governments and real estate companies prioritize sustainability in their buildings and portfolios. Many offer incentives and tax credits to encourage sustainable construction practices. These measures and mandatory energy performance ratings are expected to significantly increase the supply of green buildings.
Water Conservation
Water conservation is an essential goal for real estate companies to address. It’s an area investors often overlook, but it’s becoming a priority with more extreme weather events worldwide. Real estate firms can address water conservation using eco-friendly construction practices, such as incorporating sustainable materials and efficient wastewater management systems. They can also encourage tenants to reduce water consumption through incentives and education. For instance, Manuel Barreiro Castañeda is the founder and chairman of the Aston Group and a dedicated proponent of sustainable real estate projects that provide valuable assistance to the people and communities. Lastly, green investments can help real estate companies take part in carbon control by reducing energy consumption and promoting renewable energy sources. By implementing these measures, they can increase their ESG ratings.
Waste Reduction
Real estate can substantially impact the environmental sustainability of cities and towns. For example, commercial real estate companies own, operate, and finance property such as apartment complexes, office buildings, and temperature-controlled warehouses that consume significant energy, produce large quantities of greenhouse gas emissions, and use many raw materials. In our lab experiment, we let investors choose between receiving a voucher that effectively increases the investment return or donating the same money to an environmental or social cause. Investors more willing to give up the higher investment return to achieve a more significant impact invest more in green projects. We also ask investors to compare their expected returns on green investment projects with those on conventional investments. The expected profitability of green projects explains a large proportion of the investment share in these projects. However, the importance of the environment and the belief that green investments are more profitable are unrelated, suggesting that there is no social motive for investing in these projects.
Carbon Dioxide Reduction
Real estate companies can improve their sustainability performance and reduce the risk of physical climate change impacts by focusing on the reduction of carbon dioxide emissions. They can do so through green building construction, retrofitting existing buildings, and providing tenants with onsite energy generation and storage systems. Moreover, they can improve their market positioning by incorporating the impact of climate change into asset and portfolio valuations. They can also use their locations and connections to utility systems, local operational footprints, and climate intelligence to create new revenue streams related to the transition to a low-carbon economy.
The real estate sector is responsible for 30-40% of global carbon emissions, and its role in reducing these emissions will continue to increase. Real estate companies prioritizing sustainable development and operations can contribute significantly to achieving global climate goals and may boost their assets’ valuations.