ESG: It’s Impact on the U.S. Real Estate Market: Shifting Priorities

ESG, or Environmental, Social, and Governance factors, notably influences the U.S. real estate sector. Impending reporting mandates and evolving investment standards drive this.

The Securities and Exchange Commission (SEC) has proposed ESG regulations mandating climate-related disclosures in the United States. These rules enhance transparency by requiring companies to report annual carbon emissions, detail strategies to mitigate climate risks, and outline plans for achieving net-zero emissions. Finalization of these climate disclosure regulations is anticipated by April 2024.

Furthermore, the SEC has amended the “Names Rule,” stipulating that 80% of assets in a registered investment company’s portfolio must align with characteristics implied by its name. This adjustment targets deceptive practices, including those involving investment funds with ESG-related names.

ESG considerations are also reshaping investment criteria within the U.S. real estate landscape. Buildings are recognized as significant contributors to global energy-related carbon emissions, prompting real estate entities to factor ESG considerations into their asset acquisition and divestment strategies. These considerations encompass non-financial aspects such as environmental impact, market competitiveness, and investor preferences.

Not all Environmental, Social, and Governance (ESG) Laws Bad for the Bottom Line

However, the shift towards ESG is not solely driven by external pressures. Green property management presents inherent value propositions, including cost reduction and enhanced return on investment. High carbon footprints lead to increased operational expenses for landlords and tenants. One example is utility costs and penalties imposed by regulatory frameworks like New York City’s Local Law 97. Additionally, insurance premiums rise to mitigate climate-related risks such as hurricanes, floods, and wildfires. Moreover, green buildings boast higher tenant retention rates and attract favorable lending terms from financial institutions.

In essence, the U.S. real estate market is under mounting pressure to prioritize ESG initiatives. As regulatory frameworks, investment standards, operating costs, and disclosure requirements evolve, staying abreast of these developments and providing clients with pertinent insights tailored to their business objectives is crucial.