The Real Estate Industry and Environmental Social and Governance Awareness (ESG)

Table of Contents

List of Abbreviations

List of Tables

List of Figures

1 Introduction
1.1 Problem Formulation
1.2 Objective
1.3 Approach

2 The Real Estate Industry and ESG
2.1 The Real Estate Market
2.1.1 Definition
2.1.2 Industry Dynamics
2.1.3 Real Estate Industry Audiences
2.2 E, S, and G
2.2.1 Environmental Issues
2.2.2 Social Issues
2.2.3 Governance Issues

3 Stakeholders and Metrics for Their ESG Awareness
3.1 ESG Awareness of External Stakeholders
3.1.1 Society’s Interest and Influence
3.1.2 Metrics for ESG Awareness Among Society
3.1.3 Government’s Interest and Influence
3.1.4 Metrics for ESG Awareness of Governments
3.2 ESG Relevance and Metrics for Direct Stakeholders
3.2.1 Intrinsic Motivations for Real Estate Companies to Engage in ESG
3.2.2 Metrics to Measure ESG Awareness of Players in the Real Estate Industry
3.2.3 Critical Appraisal

4 Case Studies for Market Metrics
4.1 Measuring ESG Awareness in Brazil
4.1.1 The Case of Sao Paulo, Brazil
4.1.2 Discussion
4.2 Measuring ESG Awareness in Malaysia
4.2.1 The Case of Malaysia
4.2.2 Discussion
4.3 Measuring ESG Awareness in Canada
4.3.1 The Case of Canada
4.3.2 Discussion

5 Measuring ESG Awareness Effectively
5.1 Market Metric Insights
5.2 Driver Metric Insights
5.3 General Insights for Developed vs. Developing Markets
5.4 Critical Appraisal

6 Conclusion
6.1 Insights
6.2 Limitations, Discussion and Outlook

References

List of Abbreviations

BREEAM Building Research Establishment Environmental Assessment Methodology

CAPEX Capital Expenditures

CDP Carbon Disclosure Project

CEO Chief Executive Officer

CFA Chartered Financial Analyst

CSR Corporate Social Responsibility

EPC Energy Performance Certificate

ESG Environmental, Social, Governance

ETF Exchange Traded Fund

GDP Growth Domestic Product

GHG Greenhouse Gas

GRESB Global Real Estate Sustainability Benchmark

GRI Global Reporting Initiative

LEED Leadership in Energy and Environmental Design

NABERS National Australian Built Environment Rating System

NGO Non-Governmental Organization

PRI Principles for Responsible Investment

REIT Real Estate Investment Trust

REMF Real Estate Mutual Fund

ROC Return on Capital

RPI Responsible Property Investing

SASB Sustainability Accounting Standards Board

UN United Nations

USP Unique Selling Point

List of Tables

Table 1. Preliminary Metrics for External Stakeholders

Table 2. Preliminary Metrics for Internal Stakeholders

Table 3. Identified Metrics and Drivers from the Brazilian Case Study

Table 4. Identified Metrics and Drivers from the Malaysian Case Study

Table 5. Identified Metrics and Drivers from the Canadian Case Study

Table 6. Effective Metrics to Measure ESG awareness in the Real Estate Industry

Table 7. ESG Push and Pull Drivers

List of Figures

Figure 1. Research Approach Diagram

Figure 2. Number of US REITs Reporting ESG Publicly per Nareit (Nareit, n.d.b.)

Figure 3. Number of US REITs Issuing Stand-Alone Sustainability Reports per Nareit (Nareit, n.d.b.)

Figure 4. ESG Reporting Frameworks Used by US REITs per Nareit (Nareit, n.d.b.)

1 Introduction

1.1 Problem Formulation

The push towards environmental, social, and governance efforts has become increasingly visible. Especially long-term investors are continuously pressing for companies to engage in more responsible actions, holding them accountable for their environmental, social, and governance (ESG) performance. While returns traditionally have been investors’ number one concern, ESG issues are now almost universally the top focus for leaders and investors likewise (Eccles & Klimenko, 2019). Current topics, such as the COVID-19 pandemic, relate to the importance of ESG issues for the market since “companies don’t operate in a vacuum” (Rymer, 2020). Not only are investors pushing towards sustainable investing, but also governments are increasingly looking towards implementing ESG solutions, for example, the European Commission(Bärschneider, 2019). The United Nations have decided to achieve sustainable development and tackling environmental, social, and governance issues long term by setting Sustainable Development Goals in their 2030 Agenda. The Paris Agreement, brought into effect by the UN in 2016(UNFCCC, n.d.), sets further goals towards combatting climate change and reducing greenhouse gas emissions. These matters are of great relevance to the real estate industry and its stakeholders, as real estate accounts for nearly one-third of global greenhouse gas emissions and consumes around 40% of energy globally (Bentall Kennedy & REAL PAC, 2019). As one of the industries with the highest carbon footprint, the real estate sector needs to cut 77% of total carbon emissions by 2050 compared to 2016 in order to meet goals set out in the UN Paris Agreement. These facts are alarming. Especially the longevity of real estate makes ESG issues particularly relevant for this industry. Thus, the real estate industry carries a significant amount of importance and responsibility when it comes to reaching these climate goals.

It is, therefore, essential to analyze the level of ESG awareness within the real estate industry in order to see how advanced the knowledge and understanding of ESG issues among stakeholders are. Markets with identified low awareness can then be particularly supported towards improving environmental, social, and governance efforts to align with and achieve the overall goals for sustainable development.

1.2 Objective

The objective of this paper is to identify potential metrics that can be used to measure the awareness of environmental, social, and governance factors within the real estate industry effectively. Thereby, this paper also attempts to identify drivers that encourage stakeholders to increase their ESG awareness.

This paper further looks at the issue of ESG for the real estate industry from a macro perspective rather than a micro-perspective. Thus, metrics will be accordingly high-level to hopefully capture the awareness within the market from a multi-dimensional perspective, rather than analyzing the ESG metrics for a single player in the real estate industry.

1.3 Approach

What are effective metrics to measure ESG awareness within the Real Estate Industry? To answer the above research question, this paper takes the approach to find a set of metrics that is observable from a general stakeholder standpoint and give a holistic picture of the “knowledge and understanding” (definition of awareness per Cambridge Dictionary, n.d.) on ESG within a real estate market.

This paper firstly lays out the fundamentals needed to understand why and how ESG is relevant to the industry. Therefore, the real estate industry shall be outlined, and relevant players in the real estate industry shall be presented in Chapter 2. The audiences of the real estate industry are dealt with holistically, including owners and advisers, direct and indirect investors. However, due to the scope of this paper, the debt-side of the market is not covered. Furthermore, the meaning of environmental, social, and governance for the real estate industry shall be explained respectively. With this understanding, this paper will further go into detail about the ESG case itself and identify relevant external and internal stakeholders that have an interest and an influence on the ESG awareness in the real estate industry in Chapter 3. The same chapter also tries to highlight those stakeholder’s motivations for ESG and identify preliminary metrics to measure ESG awareness for these stakeholders on a macro-level. The following chapter concentrates on three case studies that focus on a geographical real estate market from either a developed or developing country. The analysis of these case studies in Chapter 4 shall then help identify metrics that measure ESG awareness within the respective markets. Chapter 5 formulates insights from these studies and refines the preliminary metrics from Chapter 3 with the insights from Chapter 4 to a final set of effective metrics. The same chapter also presents a set of insights regarding ESG awareness in developing versus developed markets. Finally, in Chapter 6, this paper will conclude important findings, as well as critically evaluate the content and its chosen approach and give an outlook on further research opportunities.

This paper uses a combined approach of literature review and supplemental analysis to achieve the final result of a list of effective metrics to measure ESG awareness within the real estate industry. The approach is visualized by Figure 1 below.

Abbildung in dieser Leseprobe nicht enthalten

2 The Real Estate Industry and ESG

This chapter attempts to lay out the groundwork needed to grasp the topic and comprehend the following chapters, which are building upon this industry knowledge in order to answer the given research question. In particular, the first part will attempt to give a definition and a brief overview of the real estate industry and the many ways to engage in real estate. How someone chooses to invest in real estate will define which environmental, social, and governance issues are directly applicable to that stakeholder. The second section of this chapter then attempts to define the abbreviation “ESG” and identifies how each of the three categories is relevant to the real estate industry.

2.1 The Real Estate Market

The real estate market, like every market, has its distinct dynamics. To comprehend in what ways ESG is relevant and can be applied to the real estate industry, this chapter vides an overview of the industry dynamics. It also broadly explains the relevant audiences in the real estate industry by describing in which ways one can engage in real estate. The different levels of engagement with real estate define how ESG issues apply to different direct players in the real estate industry.

2.1.1 Definition

Real estate is defined as land, buildings, and associated property rights such as air rights above land, and underground rights below the land (Amadeo, 2020). The definition also includes the property’s natural resources(OED, n.d.). The term also means “real property” or “physical property” (Amadeo, 2020).

Real estate can be divided into different types, including residential, commercial, industrial, and land. Residential real estate can be subdivided into different categories, such as single- or multi-family homes. Commercial real estate includes profit-generating buildings such as offices, hotels, commercial centers such as strip malls or shopping centers, as well as educational or medical buildings(Amadeo, 2020). Industrial real estate is a category of commercial property and includes structures used for manufacturing, such as factories, plants, research centers, and warehouses(Taylor, 2018).

2.1.2 Industry Dynamics

The real estate market encompasses all properties available for sale in a given area and its prices are influenced according to the principles of supply and demand. When demand increases, prices usually rise, while when there is low demand, real estate prices are lower as well (Taylor, 2018).

The real estate market differs from other markets in different factors, for instance, its durability. Real estate is not consumed like other assets, but it persists, and might even appreciate over time (Taylor, 2018). Moreover, supply in the real estate market is inelastic. There is an unavoidable delay in catching up with the demand that goes beyond what the market can supply. This delay is due to the construction of new buildings that need to be built in order to respond to demand changes (Özbaşa, Özgünb, & Barlasc, 2014). The real estate market is also affected by seasonality, making it a more active market in the summer rather than in the winter. Furthermore, locality plays a notable role. There are differences in attributes when comparing different local real estate markets. Prices and market activity will differ significantly for real estate in different geographical areas (Taylor, 2018).

The real estate market is influenced by different macro and micro factors. Macro factors include demographics, interest rates, inflation rates, general economic indicators such as the GDP, and government policies and regulations (Nguyen, 2019). Micro factors that will be specific to a certain local real estate market include income, land constraints, infrastructure and transportation, weather exposure, and taxes, among others (Taylor, 2018).

2.1.3 Real Estate Industry Audiences

The many ways of engaging in real estate investing create different audiences in the market – from the owner to the direct and indirect investor(Climate Strategy & Partners, 2016). The roles of players in the real estate market can take on range, from that of the tenant to the asset manager to the real estate mutual fund investor. The way stakeholders engage with real estate also determines the type of influence ESG can have on them, and vice versa (Climate Strategy & Partners, 2016).

On the one hand, one can decide to actually buy a property. From there, the homeowner can go for different strategies, apart from a buy-and-hold strategy where the investor owns and uses property themselves. For example, an investor could so-called “flip” a property by buying it, fixing it up, and selling it for a profit (Fiorillo, 2019). There is also the possibility to buy a property – residential or commercial – and rent it out. If regulation allows, this can also be done through lodging Apps such as Airbnb.

On the other hand, one doesn’t have to buy physical buildings to invest in real estate. One option to do so would be to invest in real estate investment trusts (REITs)(Fiorillo, 2019). A REITis a company that owns or finances income-producing assets. There are different types of REITs. Some contain a focus on a certain type of property, residential or commercial. Although most REITs are equity REITs, some REITs trade within property mortgages instead of physical properties (Fiorillo, 2019). Since 90% of a REIT’s taxable income is paid to shareholders via dividends, purchasing shares in thriving REITs has the potential of a profitable investment (Fiorillo, 2019). REIT shares can thus be traded like stocks and can allow shareholders to partake in the real estate market (NAIOP, 2017, p. 19).

Another option to invest in real estate without buying the tangible asset is through real estate mutual funds (REMF). As opposed to REITs, real estate mutual funds are not actual companies, but simply act like regular mutual funds by pooling investors’ money which then is invested in real estate(Fiorillo, 2019). REMF investors can easily demand their shares to be redeemed and cashed out at any time, which makes REMF open-ended funds (Evans & Evans, n.d.).

Furthermore, there is the possibility to invest in real estate exchange-traded funds (Real Estate ETFs) or REIT ETFs. ETFs are a type of security that includes a collection of securities, for example stocks. They are comparable to mutual funds, although ETFshares trade just like ordinary stock at an exchange (Chen, Exchange-traded fund - ETF, 2020). REIT ETFs are essentially ETFs that invest in REITs. REIT ETFs are generally less risky than investing directly in a REIT or a physical property but might not yield an as high return (Fiorillo, 2019).

Another possible way to invest in real estate without purchasing actual property is by investing in real estate-related companies. Those could, for example, be real estate service companies or construction companies.

Other ways to profit through real estate include functioning in a profession within the industry, for instance, by becoming a wholesaler, real estate appraiser, and real estate agent or broker. Wholesaling property is a real estate investing strategy that can be compared to flipping homes. As opposed to a “flip”, investors do not own the property at any point in the process when wholesaling, neither do they partake in any maintenance cost(Fiorillo, 2019). Wholesalers take on a contract with a party of homeowners wanting to sell their property to a potential buyer and make a profit by finding another buyer willing to purchase the property for a higher price than the amount agreed upon by the original homeowner (Segal, 2019). Real estate appraisers, on the other hand, determine the value of a property by taking specifics about the property and the environment into account(Fiorillo, 2019). In addition, real estate agents are licensed professionals within the industry who usually work for brokers, which in turn can be individuals or brokerage firms. Real estate agents work on either the buy or the sell-side of a deal and help to find an appropriate property or buyer to facilitate a transaction that they make a commission off of (Chen, 2019).

In terms of risk, investing in real estate is generally considered to be moderately risky, less risky than investing in stocks, but riskier than investing in bonds (Mellott, n.d.). On the one hand, the regular income through rent payments can be compared to coupon payments from bonds and makes real estate investing less risky. On the other hand, real estate includes tangible assets, which adds to the illiquidity and, therefore, risk of the investment (Grant, n.d.).

2.2 E, S, and G

E, S, and G stand for environmental, social, and governance. They are seen as “the three central pillars used when measuring the sustainability or ethical impact of a business or company”(CodeGreen Solutions, 2019). ESG criteria are not only used to measure but also to “manage, monitor, and report on an organization’s sustainability performance”(Nareit, 2019). John Hill, President and CEOof Derivatives Strategy Group in Rye, New York, states in Chapter 2 of his book Environmental, Social, and Governance (ESG) Investing that a universal agreement on how to use ESG does not exist. The author states that it is often used interchangeably in the finance world with other terms such as socially responsible investing or impact investing (Hill, 2020, p. 13). The term ESG was first coined in a 2004 report by the United Nations (UN) that had recommendations by players in the financial industry to better integrate ESG issues in the investment process(The Global Compact, 2004). The report also states that “companies with better ESG performance can increase shareholder value by better managing risks related to emerging ESG issues, by anticipating regulatory changes or consumer trends, and by accessing new markets or reducing costs”(The Global Compact, 2004, p. 27). ESG related criteria are to analysts and investors what corporate social responsibility is to companies(Allianz, 2017). It “can be seen as the common denominator for companies on the one hand and analysts/investors on the other”(Allianz, 2017, p. 2).

The following subchapters try to describe what each of the three ESG categories means specifically for the real estate industry.

2.2.1 Environmental Issues

Environmental refers to the impact that an organization has on the natural environment through its processes, policies, and practices(Nareit, 2019).

In 2015 the United Nations ratified the Paris Agreement which aims to combat climate change and to support measures towards lowering greenhouse gas emissions rapidly(United Nations, 2015). Together with the 2030 Agenda for Sustainable Development Goals, the UN has set concrete goals towards this purpose. The United Nations Environment Program (UNEP), founded in Stockholm in 1972, launched the UNEP Finance Initiative (UNEP FI) in partnership with the global financial sector in 1991 to mobilize the private finance sector towards sustainable development(UNEP FI, n.d.). The initiative established three organizations, among those Principles for Responsible Investment (PRI) in 2006, together with the UN Global Compact(UNEP FI, n.d.). PRI provides a framework with principles for responsible investment and encourages their integration(PRI, 2019).

In their 2016 Sustainable Real Estate Investment Report, UNEP states that the real estate sector is responsible for one-third of the annual global greenhouse gas emissions (GHGemissions) and contributes around 40% to the world’s energy consumption(Climate Strategy & Partners, 2016). As one of the industries with the highest carbon footprint, the real estate sector needs to cut 77% of total carbon emissions by 2050 compared to 2016 in order to meet goals set out in the UN Paris Agreement. These alarming facts show that the real estate industry carries a significant amount of importance and responsibility when it comes to reaching these climate goals.

Although ESG issues are often treated as a novelty, the real estate industry has been engaged in environmental efforts all along. Especially topics such as “green real estate” or “green building” have been around for a while (Zuo & Zhao, 2014). The term “green housing” specifically has been coined in the 1960s (Mao, Lu, & Li, 2009). The activity of green building projects has been steadily growing (Morrow, Read-Brow, O'Sullivan, & Garz, 2015, p. 11). The increasing demand for sustainable and environmentally friendly building materials, with an expected market value of 364.6 billion USD for the green building materials sector by 2022, further underpins this trend(Grand View Research, 2018).

Most of the environmental factors relevant to the real estate industry regard the real estate and its construction directly. Green building materials contribute to the environmental benefit through reduced use of toxic leaded paints, which improves the air quality(Grand View Research, 2018) and reduces the risk of pollution when remodeling a property. Green building materials further allow for more natural lighting, which reduces utility costs through lowered energy usage(Grand View Research, 2018).

Historically, companies in the real estate sector have mostly aimed their ESG attention at efforts around energy-efficiency and reducing related GHG emissions(CodeGreen Solutions, 2019). While the World Economic Forum mentions the reduction of emissions as an essential principle, it also mentions that the whole picture of the ecological footprint is to be considered and therefore calls on the usage of renewable resources(World Economic Forum, 2016). Taking the environment into consideration as a player in the real estate industry also means assessing the “exposure to risk from natural shocks, environmental regulation and the economic impacts of climate change”(World Economic Forum, 2016, p. 4).

The real estate sector places the highest emphasis on the “E” out of ESG, which is likely to be influenced by mandatory and voluntary environmental regulations and certifications(Allianz Global Investors, 2015). As local governments continue to implement stricter targets to reduce emissions, real estate owners and operators are increasingly integrating environmental performance into their business strategies(CodeGreen Solutions, 2019).

A study on the implementation of ESG in private real estate portfolios that surveyed leading Pan-Europe and US institutional real estate open-end fund managers has found that fund-managers also place a great amount of emphasis on the environmental aspect of ESG, in lieu of social or governance issues(Larsen, 2010). The paper finds that this environmental focus might be driven by the quantifiable nature of sustainability initiatives, in terms of no-cost or low-cost, return on cost (ROC), and near-term investment payback periods on sustainable building systems initiatives (Larsen, 2010). Overall, fund-managers agree that responsible investing in properties could enhance investor value. (Larsen, 2010).

The Principles for Responsible Investment (PRI), an initiative led by the United Nations, further defines the environmental pillar of the three ESG pillars to include a variety of factors. Among those are climate change, resource depletion, waste and pollution, and deforestation(CodeGreen Solutions, 2019). Since the listed metrics are not specific to an industry, not all issues are directly relevant to the real estate industry. It is up to a company to analyze which issues are material to its business performance, financially, as well as operationally. The Sustainability Accounting Standards Board (SASB) is a foundation that helps businesses identify, manage, and report on the ESG issues that are relevant to their industry(SASB, n.d.). SASB creates industry level maps of materiality. The real estate industry falls under the infrastructure sector. The environmental dimensions are divided into six issue categories: GHG emissions, air quality, energy management, waste and wastewater management, waste and hazardous materials management, and ecological impacts(SASB, n.d.). SASB considers all these issue categories as likely material issues for companies in the industry.

2.2.2 Social Issues

Social refers to the processes, policies, practices, and impact of an organization regarding the interactions it creates with people, both internal and external(Nareit, 2019).

Real estate houses society, builds its foundation, and takes part in shaping and defining communities(Nareit, 2019). By being the space where people live, work, and spend their leisure time, real estate has the potential to contribute to the productivity and socio-economic benefits of society(Climate Strategy & Partners, 2016). Benefits for society can, for example, find their expression in improved productivity and concentration, reduced stress levels, and add to increased well-being of occupants(Climate Strategy & Partners, 2016). Good air quality and a high daylight exposure can contribute to these social benefits, as well as reduced absenteeism(Climate Strategy & Partners, 2016). Studies have proven that these health benefits gained from energy efficiency might even be worth around 40 to 80 billion Euro per year in Europe(Copenhagen Economics, 2012). Similarly, savings from health benefits in the US could amount to 17 to 30 billion US Dollar per year, additional savings from improved employee productivity not included(Fisk, 2000).

Social issues, other than environmental issues, depend on the type of player in the real estate industry that is being looked at. Landlords, for instance, might want to consider capital expenditure (CAPEX) when looking into social factors. CAPEX to improve social issues could go into making a building accessible for handicapped, or generally making a building safe, secure, and healthy for the tenants(Allianz Global Investors, 2015). REIT ETFs, on the other hand, can only look to invest in REITs that provide these conditions as owners, operators or financiers. They cannot, however, decide to actively make a property, they indirectly invested in, accessible.

Moreover, being a player in the real estate industry that employs people, for example, REITs or asset managers in general, adds a new social dimension that comes with the employment of people. Social issues for companies within the real estate industry that employ people are, for example, worker development programs, employee training, and health and wellness programs(Nareit, 2019). It can also include the reporting on the company’s supplier screening; diversity, inclusion, and equal opportunity policies; or health and safety policies (Nareit, n.d.b.).

Further, labor and workplace considerations should be taken into account (Hebb, Hamilton, & Hachigian, 2010). Hebb, Hamilton, and Hachigian (2010) found out in a study on responsible property investing in Canada, that factored in both environmental and social impacts on the real estate market, that investors and industry representatives show less concern regarding social issues. The authors identified the lack of relevant literature and data that proves the link between financial and business implications and improved performance on key social indicators (Hebb, Hamilton, & Hachigian, 2010, p. 13).

The SASB framework suggests that two out of seven social capital issues are material to the real estate industry, namely access and affordability, and product quality (CodeGreen Solutions, 2019). Moreover, the framework considers labor practices and employee health and safety as material human capital issues.

2.2.3 Governance Issues

“Governance refers to an organization’s processes, policies, practices, and impact with regard to its organizational design, transparency measures, policies, protocols and procedures, and formalized governing bodies, roles and responsibilities”(Nareit, 2019).

The “G” pillar, which stands for corporate governance, includes factors such as executive compensation, bribery and corruption, political lobbying and donations, board diversity and structure, and tax strategy(CodeGreen Solutions, 2019). Issues such as standardized property valuation and investor relations, as well as corporate ratings, also fall under governance(Schulte, n.d.). For developers or building companies, these management standards are applicable on a “grassroots level”(Allianz Global Investors, 2015, p. 2). Governance Issues for real estate funds, on the other hand, rather relate to fund guidelines and investment management guidelines(Allianz Global Investors, 2015). Thus, the way in which corporate governance is applicable to players in the real estate market depends on the type of business and its corporate structure. Nevertheless, transparency is one of the key issues that will help reduce information asymmetries in the industry (Schulte, n.d.). Lecomte and Ooi (2013) confirm that REITs with the best practices in corporate governance have a smaller information asymmetry(Lecomte & Ooi, 2013). The study also shows that there is a positive correlation between corporate governance and REITs’ stock performance in terms of risk-adjusted returns(Lecomte & Ooi, 2013).

Studies have shown relations between corporate governance and performance in the real estate sector in terms of ownership structures and political connectedness in the Chinese market (Xu, McIver, Shan, & Wan, 2016), as well as board size and firm value of REITs in Hong Kong, Malaysia, and Singapore (Weterings & Swagerman, 2012). Further research has been conducted by the CFAInstitute on the governance of REITs in the Asian-Pacific market more broadly(CFA Institute, 2011).

SASB identifies business ethics, as well as critical incident risk management, and systematic risk management as material leadership and governance issues for the real estate industry(SASB, n.d.).

3 Stakeholders and Metrics for Their ESG Awareness

After this general introduction of the real estate industry, ESG, and its relevance to the real estate industry, this third chapter attempts to define ESG awareness and possible metrics for external, as well as internal industry stakeholders. Analyzing the interest and influence of external stakeholders on the one hand, and the intrinsic motivations for players within the real estate industry on the other hand, will help identify macro-metrics that might give a broad picture of the level of awareness within a certain real estate market.

3.1 ESG Awareness of External Stakeholders

This subchapter attempts to identify external stakeholders of the real estate industry and further analyze their interest as well as their influence regarding ESG issues. This analysis is essential to understanding the dynamics of pull or push powers that influence direct players within the real estate industry to then identify respective influential metrics regarding ESG awareness.

3.1.1 Society’s Interest and Influence

Sustainability measures are “required to mitigate climate change and global warming”(Wilkinson, 2007, p. 1). Society, as the main affected party, therefore, has an interest in a more sustainable economy and even in engaging in sustainable actions themselves. The interest of society to engage in ESG and to raise ESG awareness in the real estate industry is foundational as real estate shapes communities(Nareit, 2019).

Society can take influence on increasing ESG awareness in many ways. First of all, people can make their voices heard to build awareness. Movements, such as the recent “#FridaysForFuture” movement led by Swedish Greta Thunberg to appeal to governments to act on climate change(Fridays For Future, n.d.), are likely to raise awareness about climate change. Likewise, society can voice other environmental, social, or even governance concerns and, therefore, influence industries such as the real estate industry to move towards solving these issues.

Society can further contribute its share to ESG issues through their own sustainable behavior and making use of their power as buyers. By deciding to construct green buildings, or investing in REITs with high ESG scores or real estate funds that integrate ESG into their investment approach, society can influence the direction of the market. Furthermore, they can contribute to an increased overall ESG awareness in the market through their own awareness and behavior as a tenant(Surmann & Hirsch, 2016). Hebb, Hamilton, and Hachigian (2010) confirm that public opinion will very well contribute to the demand for green buildings in the future and that impulse can come from tenants, employees, or the community at large alike. “The on-going concern for environmental standards and corporate responsibility will increasingly require property companies to improve their ESG performance” (Hebb, Hamilton, & Hachigian, 2010, p. 111).

Society can also engage in non-governmental organizations (NGOs) to push for more ESG awareness within the industry. The UNEP Finance Initiative already established in their 2004 report that there are two essential components to ESG integration: better investment markets, and more sustainable societies. It mentions the responsibility of NGOs to “provide objective ESG information on companies to the public and the financial community”(The Global Compact, 2004, p. 11).

Furthermore, society can also bear an impact in this field by choosing to work for a company that helps raise ESG awareness and pushes environmental, social, and governance issues. For example, society members can take on the role of an ESG consultant who can support demand and awareness building in the industry by combining ESG research with industry-level research(The Global Compact, 2004).

3.1.2 Metrics for ESG Awareness Among Society

Firstly, a possible metric that could measure ESG awareness among society is the number of private households deciding to build an environmentally friendly house. This metric could potentially be subdivided into a range of submetrics from the usage of sustainable materials to the choice of energy source or water waste management.

[...]