Strategy for the World & Economy
ESG is the analysis regarding environment, social, governance for a company to enhance as the set of non-financial development in the 21st Century, following the new global trend whereby consumers and investors are more concerns about company's impact on the environment.
ESG Key Elements, Risks and Measurement in Real Estate Industry.
30 September 2022 -- Jomkhwan Borrirak
13 min read
In 2022, real estate market is indeed interesting to observe and analyse as the industry has been through the significant disruption since 2020. Due to the lockdown measurement and covid situation, the revenue in the real estate industry has undoubtedly decreased significantly from the last year. To cope with changing consumer behaviours and the New Normal lifestyles, the property development business tended to shift their focus on low-rise development and plan to diversify the hotel business through partnership. In addition to the recovery plan, I propose this article for the real estate companies explore ESG and embed key elements into their corporate business plan during this post-covid epoch. In this article, the reader shall also find the ESG key elements, potential risks as well as performance measurement of the policy;
Initially, it is essential to note that ESG strategies differed according to the organisational targets and investors’ need. Therefore, a company is in need to analyse one’s goal in order to select the optimal ESG key elements for a company. With that being said, the elements regarding the ESG of company A may touch upon the recovery plan through the attraction of sustainability intentions in its real estate and enhance resilience into new environmental, social and governance settings. In other words, all environmental, social and governance should be the key elements for building Business Model Resilience to prepare oneself for the business diversification in the next few years.
The importance of the environment as the ESG key element is the set foundation that can eliminate unnecessary wastes and costs. This would extensively reduce the estate’s upkeep costs as well as creating cost resilience in the following years, which makes the environment the key ESG element to develop. To provide the observable idea, the creation of a self-sustained cycle of management could make a fit to create the environment that requires less adding of materials and funding in the future such as proper waste recycling, decarbonisation of the property or green material and design selection that minimise energy and water usage. Moreover, the element would also secure the positive image of the company as individuals and investors are more concerned with the company’s impact on the environment.
In order to implement such policies, the social and governmental elements could assist the possibility through the elevation of the organisational relationship with the stakeholders, the making of resilient labour practices as well as emphasis on the alignment of company’s incentives to the internal individuals and investors’ expectations. These two elements are then, becoming the crucial settings to line up the incentive with the business partnerships as they could illustrate business resilience, transparency and target diversification.
As the diversification of property business was implemented, it is crucial for the company’s social and governance players to be properly in line and sympathise with the changes. Therefore, the first ESG risk in this case, is the relationship between the organisational incentives and its stakeholders’ expectation whereby the misalignment between two entities may cause risks of disrupting business operations, multi-functional negative impacts or even imposing reputational damage.
The second ESG risk of the company is transition risk regarding technology, market, legal and reputation. According to Network for Business Sustainability and ESG Risk Guard, the Green building material and designs are 32% more expensive than the conventional building design. Though the outcome of the green investment is relatively positive as stated in the previous section, the increase in cost could put the stakeholders, investors or even the internal board to misalign with one another due to the potential failure of new technology implementation, potential changes in customer behaviour and perception on ESG or gaining negative external feedback which all causes the potential loss of investment. This is also including the legal factors that touch upon the permitting restrictions or regulations of new technology’s products and services. Therefore, the ESG risks without proper risk management could be costly as it threatens the normal operation.
The ESG Performance can be measured by observing the index or numbers that come as the result of the implementing ESG policies or frameworks. This so-called ‘ESG Metrics’ would seek out the level of efficiency regarding the ESG performance in a particular company. Unlike the common financial datasets, the ESG metric can be both qualitative or qualitative as they would help the organisation as well as the stakeholders to get the extensive understanding of their company’s intentions. For the case of the company A, the company could utilise both Quantitative and Qualitative ESG Metrics in order to secure every corner of information for analysing, assessing and comparing within the company’s and other companies’ related performance whereby quantitative approach would offer numeric data and easier to compute while qualitative approach would convey processes, characteristics and strategies of a company, mostly in text.
Furthermore, there is also the ESG Standard such as World Economic Forum Framework (WEF) regarding the ESG Development for a company to comply with, assess KPI and align itself with which makes it less difficult for companies to follow the global trend and set standards. With this case, a company could also go upon an ESG questionnaire which is the survey conducted by the third-party to measure the general performance of a company. This would provide an unbiased set of both quantitative and qualitative data for a company to analyse and measure the policy’s results.
Additionally, the company A could also utilise the PwC’s Total Impact Measurement and Management Framework (TIMM) which is the measurement to indicate whether the business strategy has positive or negative effects to the society regarding Environmental, Social and Economic impact. In this case, TIMM could be implemented to analyse the quantitative impacts on Environmental factors such as measuring the emissions, energy used in the construction and following completion period. Moreover, social and governance factors would be qualitatively analysed by the framework to observe the community cohesion, business model resilience, social and business ethics, company’s characteristics and strategies. All of which would provide the best fit to measure the performance and effectively assess the ESG key elements and minimise future’s risk as mentioned in the first and previous section.
According to Knight Frank Data (the international independent real estate consultancy), the supply of low-rise property and condominium reached 470% increased during the Post-Covid time, especially the suburb area whereby more than half of the new residences are either inexpensive or left empty. This information illustrated the increase in condominium supply but anyhow oversupplied the moderate growth in estate demands. With this fact, it is crucial for company to implement the ESG Strategies to make the company’s estate formidable and outstanding from all the estate supplies and thereby, attract partnership and investment to create more liquidity. The company may consider the following ESG flagship projects;
(1) Adding Estate’s Value through ‘Green Appreciation’. This project tended to touch upon the increase in the company’s image regarding the environmental factors that match with the increasing potential and global trend of sustainability in the real estate market. Hence, this sort of project would create the general benefits for the public such as ‘green’ buildings that promote a circular economy or buildings that could save energy during the construction and following completion. All of which would assist the building certificates registration as well as increase the growth in appreciation (green appreciation), resulting in more public, commercial and partnership attraction to the company’s estate and thereby enlarge the net rent and the revenue potential. This action tended to line itself up with the ESG potential in the real estate market whereby $30 Trillion USD is expected to be in global ESG funding in 2030 as investors are more and more concerned with the social impact of business dealings. Anyhow, such projects required tremendous efforts, costs and intention alignment among the governance structure and stakeholders, therefore, resilience and data arrangement tended to be next important for the company to have.
(2) Creating Resilience by considering crisis management plan, training and preparedness assessment as flagship project to assist quick recovery and minimise crisis impact. In this case of Company A, the company may decide to increase the statutory reserve to be prepared for uncertainty in business diversification and further impact on Covid-19 while also training the human capital to be resilient through crisis training programmes and simulations.
(3) Data Arrangement as the integral material information in need for implementing certain policies, procedures and controls as well as assisting the information transfer to stakeholders and potential partnerships to better understand the action of the company. This point tended to be continued from Question II whereby data reports from one-to-one entities are relatively important to achieve effective ESG targets without encountering domestic misalignment risk.
As mentioned in the previous section, building certification is essential for a company to increase net rent and revenue potential. While LEED is considered as the leading International Green Building Certification, there are a variety of certifications that company A may seek out for due to the fact that all Green Building Certificates illustrate differences and uniqueness in certain requirements, performances, criterias, data auditing duration, having different backing governmental entities as well as serving different purposes. For the most recognised green building certificates in Thailand that the company could consider, there are (1) LEED, (2) BREEAM, (3) TREES and (4) DGNB.
In regards to the actual implementation, the pursuit of LEED Certification is highly worth mentioning as this type of certificate is widely recognised by the Thai and global estate community, hence, making it less difficult for individuals to identify and thereby increasing the value of the project as a whole. Secondly, the company A should also consider the TREES rating system as it provides more domestic recognition with the identical assessment with other international systems such as LEED and BREEAM. With that being said, the combination of LEED and TREES rating system is highly recommended to certify the Company A’s building as the project shall be recognised globally as well as domestically.
To provide more clarification, LEED — “Leadership in Energy and Environmental Design”, the certificate is considered to be the most well-known and ahead of the green building rating system in the global level. The rating system consisted of various levels such as the Certified level (40-49 points) or up to the Platinum level (80++ points) whereby the company could match the level of certification to the level of organisation and stakeholders’ expectations. The rating system also touches upon the particular project periods, sections and designs, such as Building Design and Construction (BD+C), Interior Design and Construction (ID+C) or Building Operations and Maintenance (O+M). As a matter of fact, the LEED Homes rating system is also one of the assessments that consider low-rise residential buildings which exactly match with the Company A’s during the Post-Covid time. While BREEAM and DGNB also touched upon the same assessments, they tended to serve different targets. For instance, DGNB prioritises the performance-based approach and technical quality rather than the environmental designs and innovation index or BREEAM system that adopt more quantitative threshold and standards, academic and rigorous approach rather than simpler optional standards and percentage threshold.
For TREES — “Thailand Rating Energy & Environment System”, is the Thai owned certification that utilised identical mechanisms and developed on the basis of LEED but modified to fit with the Thai context and particular needs. Meaning that the certificate would provide the best fit for domestic recognition and increase the project’s value locally. Therefore, the combination of TREES and LEED is crucial to gain momentum of aligning the project with sustainability.