ESG: The upcoming business priority in real estate

By LODHA

Urban communities that are resilient and inclusive - socially, environmentally, and economically, are the need of the hour.

According to a recent report titled 'Real Estate Industry: Outlook and Challenges' by Infomerics Valuation and Rating, the Indian real estate industry is on course for sustained high growth at over 75% year-on-year (YoY) for the next three years. 

Pretty much validating the same is another report by IBEF which states that the real estate sector in India is expected to reach a market size of $1 trillion by 2030 and contribute 13% to the country's GDP by 2025.

As the third-largest sector in terms of FDI flow, second-largest employment generator, and third-largest sector to induce economic growth, the contribution of the real estate sector towards the national economy is not unknown. 

Considering the importance of real estate in the nation's economic growth, real estate developers and the sector at large shoulder a significant responsibility to ensure that this growth progresses sustainably and further accelerate de-risking of ESG issues. 

As a result, the ESG dimensions - Environment, Social, and Governance, are becoming key components in the sector for business decision-making, and at the level of every stakeholder.
With the evolving landscape, the yardstick for business success has considerably shifted from short-term profitability and shareholders to long-term sustainability and stakeholders. 

Businesses have of late undergone significant changes amidst externalities such as impending disruptions due to climate change, finite resource availability, deteriorating ecosystems, and evolving stakeholder expectations. 

The impact of climate-related issues has unequivocally been accepted by the world and controlling the rising levels of carbon emissions has become more of an existential issue for humanity; also, the fragility of the societal thread of communities, and the importance of well-planned governance during unprecedented times have been significantly emphasised by the recent pandemic. 

These factors combined have now put a sharp focus on ESG considerations than ever before.

The country's real estate sector is responsible for about 22% of the total emissions and is one of the largest consumers of natural resources. Thus, for combating climate change, the real estate sector has immense potential to reduce emissions through sustainable practices. 

With close to 70% of India's 2030 urban infrastructure yet to be built, the real estate industry has a huge opportunity to abate the ever-increasing operational energy requirements of buildings and save embodied carbon emissions, while also positively impacting close to 250 ancillary industries like cement, steel, etc. which depend on it.

On the other hand, with the changing lifestyles, sustainability has emerged as a priority for consumers. A recent survey by Lithium Urban Technologies too reveals that 69% of respondents have shifted towards a more sustainable way of living. 

This shift is reflected in their purchase decisions and homebuyers are keen for developers that adhere to ESG propositions.

Resultantly, developers offering green housing or LEED-certified projects are witnessing a higher preference. Looking at the downsides of energy-intensive buildings, consumers are now preferring more efficient properties. 

Through sustainable design, construction and operations, green buildings are climate-resilient, consume less water, optimally use energy, conserve natural resources, generate less waste, enhance biodiversity, ensure healthier living spaces, while providing better ventilation, adequate daylight, superior air quality, and overall well-being. 

A large-scale shift towards green housing thus acts as a viable way to address climate change.

Going a step further, developers need to set science-based decarbonization targets for achieving carbon-neutrality and staying ahead of the risks of transitioning to a low carbon economy.

They must also consider climate science to evaluate the physical climate risks that affect the geography where they are developing their real estate. 

Integration of renewable energy use in the products, and also in construction and development activities are key steps that the real estate industry can take to effectively accelerate decarbonisation.

With ESG now playing a much more prominent role in how companies operate, investors too are embedding ESG considerations into every stage of the property lifecycle, from due diligence to acquisitions and from leasing to asset management. 

There is an increasing demand from fund managers to invest in companies with high ESG scores. Being ESG focused thus makes a lot of economic sense as real estate players can market their products as net-zero ambition structures to the investors, customers, and other stakeholders. 

A study by McKinsey also reveals that a focus on sustainable practices helps improve operational efficiency and enable higher cost reductions while also fostering investment and asset optimisation, all of which can lead to a higher valuation for organisations with high ESG ratings.

With the motto of 'planet over profit' dominating in recent times, ESG has emerged as the new paradigm across industries. 

The real estate industry is too playing an assertive role in shaping the narrative and adopting global best sustainability practices. 

Developers are no longer focusing merely on their self-interest, rather widening their radar to encompass the well-being of the environment in which they operate and the society they interact with and to factor in the welfare of all the stakeholders. 

Urban communities that are resilient and inclusive - socially, environmentally, and economically, are the need of the hour. 

The coming times will witness the industry taking more concrete steps to incorporate this multi-pronged approach into every aspect of the value chain.

Published in Business Today