A cursory glance across news headlines and you’d be forgiven for feeling the world is back-pedalling — or at least plateauing — on sustainability. Banks and institutional investors are leaving sustainability accords. There are warnings that environmental, social and governance (ESG) supply chain laws have counterproductive effects.  

Meanwhile, automakers are scaling back electric vehicle (EV) targets, offshore wind projects are being cancelled and fears about greenwashing abound. Gains by far-right parties in this month’s European Parliament elections and campaigning in the polarised US both add to these challenges.

But coming back from the Urban Land Institute (ULI) Europe Conference last week, and the Mipim property gathering in Cannes in March, one can’t help but feel buoyed that the real-estate industry — which is one of the world’s biggest polluters — could be a sustainability bright spot. 

Not lip service

For logistics developers, sustainability “is everything”, says Panattoni’s Gustavo Lupi. “It’s no longer a ‘nice to have’, but a must have.” John Harcourt of Kajima Properties Europe notes that warehouse and industrial property tenants’ decisions are being shaped by their customers — particularly younger ones — who are purchasing in line with their personal values. “Manufacturing and storage facilities are [among companies’] biggest investment. So they’ve been making them green and socially responsible as a big part of how they can project that image,” he says. “It's not lip service, it’s a genuine commitment.”

Within offices, there’s evidence that tenants are just as committed. Catherine Guizol, a director at Ipsen, says when the pharmaceutical firm chooses new offices, the building’s sustainability is second only to location. The prohibitively high expense of installing sufficient EV charging in an existing carpark was one reason behind a decision to relocate its offices. Other tenants have set maximum thresholds for emissions and energy consumption per square metre, above which they won’t lease or buy.

Some 40% of global carbon dioxide emissions come from the real-estate sector, but JLL’s latest decarbonisation survey of 1000 investors and corporate occupiers globally found that 83% are looking to innovate and accelerate their sustainability strategies.  

Among occupiers, self interest plays a role in this. CEOs often have ESG targets baked into their key performance indicators, and improving a building’s energy efficiency is low-hanging fruit when it comes to claiming a hefty bonus. However this is an area where the ends justify the means. 

More on real estate:

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• French Covivio upcycles Italian tax office into urban living
• Nearshoring drives Europe’s logistics investment growth

‘S’ shortcomings

The industry is far from a saint in sustainability, though. Its progress is most evident in Europe, while the ESG backlash is most pronounced in the US.

Even on this side of the Atlantic, climate commitments are driven by blue chip tenants and big investors. At ULI’s event, Guilain Decrop of Norges Bank Investment Management said he sees “a massive financial opportunity for asset owners to create value by buying brown buildings and converting them into green buildings”. But others note this isn’t financially feasible for all investors. Less than cordial relations between occupiers and owners can also make it hard to agree on upgrades and who foots the bill.

Real-estate is also falling short in the ‘S’ of ESG. The private sector must play a bigger role in tackling the lack of affordable housing in major cities across Europe. But developers and investors at Mipim were keenly aware of the need to help address this. As Mr Harcourt noted, the group’s focus on building student accommodation helps free up existing apartment space for families and workers. 

Tangible investments

Advisors expect that by 2030, real estate’s social commitments will start rivalling its environmental pledges, with occupiers subletting unused space at discount rates to non-profits and community projects. 

In the meantime, industry leaders are seeking more collaboration, a carbon-pricing framework, and new phrases to replace the weaponised term ESG. That’s despite the phrase being “less tainted” in real estate as elsewhere, as one advisor surmised at Mipim.

The intangibility of sustainable finance and regulations — and in many places, the physical effects of ESG failings — makes it easier to portray these as flimsy concepts. Brick and mortar property, on the other hand, brings sustainability to life. Property insurers pulling out of Florida and California due rising sea levels and wildfires, and the properties perishing in these disasters, is a compelling rebuke to ESG critics. 

To push sustainability forward, let’s focus on physical investments. There’s no more physical an investment than property and it’s an area where the industry is doing a commendable job.

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