If you take a long-term view of investing, how successful a company will become is determined by what the company does for the environment, how it interacts with society, and how it is set up to be run. The investment world has shortened this idea down into three letters: ESG. They stand for Environmental, Social, and Governance and have come to represent priorities that make a company both sustainable and resilient in the long term. The popularity of these kinds of investments has gained prominence in many corners of the commercial real estate arena in recent years. Everyone from developers, owner-operators, and private equity firms have raced to make loud proclamations about their newfound commitments to sustainable and equitable business models. Once considered a fringe strategy, investors have increasingly demanded that their money not only continue to generate significant profits but also play a role in mitigating the climate crisis and other societal ills.
While real estate owners large and small have offered bold promises about reducing carbon emissions, diversifying boards and other initiatives, it is only recently that many of them have begun to share details on just how they plan to achieve those goals. Only now are we beginning to see both concrete plans to reach these often lofty objectives, as well as the methods of reporting they will use to measure their progress. These early returns show there is much to be encouraged about, while also leaving considerable room for concern about whether these measures, focused almost entirely at the property level, will ever have meaningful impact beyond the sum of their various parts.
In fairness, there are plenty of positives about the real estate industry’s shift toward sustainability. Institutional investors such as Ivanhoe Cambridge and Norway’s Sovereign Wealth Fund are among the dozens of major players who have committed to implementing aggressive net zero carbon emission policies across their portfolios in the coming decades. Large-scale owner-operators like Oxford Properties now regularly report on ESG impacts of their activities, outlining annually how they have improved and what they commit to doing in the future to improve even further.
Builders have also shown a sizable and rapidly increasing interest in sustainable building practices in recent years. The U.S. Green Building Council reported that green, LEED-certified homes grew by 19 percent between 2017 and 2019 to reach an all-time high of close to 500,000 single-family, multifamily, and affordable housing LEED-certified units around the world. (More than 400,000 of these were located in the United States.)
A separate report showed that increasing numbers of real estate developers are taking on green projects, and a rising number are becoming fully dedicated green builders. For example, in the United States, the percentage of single-family home builders focused almost entirely on green projects was 19 percent in 2017 and is expected to hit 31 percent by 2022. Among multifamily developers, the percentage doing the majority of their projects green rose from 23 percent in 2014 to 36 percent in 2017 and is expected to be a whopping 47 percent by 2022. Even more encouraging, multifamily developers doing more than 90 percent of their projects green is expected to grow from 29 percent in 2017 to 40 percent in 2022.
When it comes to ESG initiatives, however, the same holistic approach has not yet taken hold. The vast majority of measures aimed at making real estate more sustainable are focused exclusively at the building level, but ignore the myriad of ways in which their developments influence occupants’ behavior which has a far greater impact on the climate as a whole.
In fact, all of these ostensibly well-meaning pursuits suffer from one major blind spot that, if unaddressed, threatens to render them largely inconsequential.
The most glaring problem with all of these apparently well-meaning initiatives is that the transportation patterns of building occupants (residents, employees, shoppers, and others) are virtually ignored. This is particularly problematic because transportation-related impacts, in particular, greenhouse gas emissions, outweigh those coming from in-building energy systems—yet the latter get far more attention. Take Ivanhoe Cambridge’s recently released pathway to achieving net zero carbon by 2040. The company is pushing the envelope when it comes to implementing sustainability in its real estate investment decisions.
Ivanhoe’s pathway to net-zero commits to a host of initiatives to draw down the carbon footprint of its portfolio, including dramatic improvements in the energy efficiency of buildings, expanding property reliance on renewable energy sources, improving the use of more sustainable building materials, and more. Yet it does not document or commit to reducing the hulking downstream carbon footprint generated by resident and tenant transportation patterns.
Tricon Residential offers another example. Tricon owns approximately $8 billion in residential developments across the United States and Canada, and is particularly active in the rental market, including in single-family rentals. In its 2020 ESG Roadmap, Tricon reported on performance across a range of environmental and social factors, but virtually ignored the vital question of how residents move to and from their homes in order to work, play, shop, get to school, and so on. Tricon’s report points to sustainable building materials and efficient energy systems, but has little to say about how their building and operational practices make certain kinds of transportation choices more likely than others.
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These omissions might easily be written off by some, transportation impacts are ultimately the responsibility of occupants, not investors or developers. But the reporting practices of Ivanhoe Cambridge, Tricon, and others in the sector already make clear that they also consider other occupant-generated environmental concerns to fall under the landlord’s purview. Most notably, real estate investors and developers are devoted to improving the efficiency of in-building energy systems, even though those emissions are ultimately driven by the daily actions of residents.
Transportation-related emissions are similarly caused by occupants but vary significantly based on the choices of developers and investors. In choosing the location of their development, its design, and whether to outfit their buildings with large swaths of on-site parking, electric vehicle stations and other features, they play a major role in either incentivizing or discouraging the use of traditional gas-powered vehicles which are among the single-largest sources of harmful greenhouse gasses.
As an urban planner, I am acutely aware of the way development affects broad patterns of human behavior. This is especially true in the way people travel as part of their daily lives – as evidenced by the massive emphasis and resources placed behind public transit access and the creation of walkable neighborhoods over the last two decades. Yet, these factors are conspicuously absent from ESG plans and subsequent reporting, and the real estate industry at large has yet to fully absorb the role transportation plays in these dynamics.
The rise of ESG-related goals in commercial real estate is undoubtedly a positive, as the pursuit of profit without regard for the broader impact has created a host of problems for society. But by ignoring the way developments shape transportation patterns, the industry risks being caught in an endless cycle trying to fix problems it simultaneously continues to fuel.
If what we really want from a long-term investment is to make a truly lasting impact, commercial real estate companies need to begin considering the entire effect of their products. This can only be done by thinking beyond the building level when evaluating not only sustainability factors but their overall responsibility to their communities. Helping shape more sustainable transportation patterns would represent a meaningful first step toward a more holistic approach by the property industry. Making our buildings safer, cleaner, and healthier to get to and from can truly change our cities and our world for the better. That is what I call a good investment.
