Sustainable commitments and returns experienced along the sustainability journey of Chinese real estate enterprises
Published: 10 September 2022
Over the past decade, public awareness of sustainability and ESG has surged. Stakeholders have been urging the development of related legislations and regulations. In response, the Hong Kong Green and Sustainable Finance Cross-Agency Steering Group, of which Hong Kong Exchanges and Clearing Limited (HKEX) is a member, announced its objective to mandate disclosures aligned with the Task Force on Climate-related Financial Disclosures (TCFD) framework no later than 2025. To support this initiative, in late 2021 HKEX released the Guidance on Climate Disclosures about reporting on the TCFD recommendations.
The TCFD is structured around four main areas: Governance, Strategy, Risk Management, and Metrics and Targets. This framework requires corporations to disclose more specific, science-based information and comparable data.
The scenario analysis elements of the TCFD help firms identify and assess the potential impact of climate-related risks on business performance in various conditions. Although this enhances companies' flexibility and resilience to climate change, establishing an analysis framework can be cumbersome. As scenario analysis should cover all of corporations’ material business operations, large firms might need to bring their overseas operations, and even their supply chains and customers, into consideration. Nevertheless, the framework encourages companies to develop at least two scenarios for comparison, including a lower-carbon pathway and a business-as-usual pathway, with scientific support including model simulation. This implies corporates must spend more resources on gathering data and making data projections.
Furthermore, the TCFD framework recommends several climate-related metrics and criteria for formulating climate-related indicators. The most well-known suggested KPIs are Scope 1, Scope 2, and Scope 3 greenhouse gas (GHG) emissions. Disclosures of Scope 1 and Scope 2 emissions are mandatory and Scope 3 emission disclosures depend on materiality. Since Scope 3 GHG emissions are indirect emissions that occur in the value chain, including downstream emissions from tenants in the real estate industry, it covers the widest range and requires the most effort. Although there are no compulsory disclosure requirements for Scope 3 emissions today, corporates are being encouraged to expand their related disclosures over time. This implies Scope 3 emission disclosures could soon become mandatory.
With the increasing transparency and higher standards for ESG-related disclosures, mechanisms need to be in place to support reporting. Firms are under pressure to improve their policies and initiatives for better ESG performance to appeal to stakeholders. However, even if companies adapt their processes to these new objectives rapidly, ongoing projects, based on a previous set of less demanding rules, will generate data that is impossible to align for several years.
Moreover, under the Paris Agreement, global average building energy intensity per square meter is required to shrink at least 30% by 2030. Committing to this agreement, China has set various specific targets in its action plans. According to China's climate policy documents, all new buildings in urban areas will be constructed to green building standards and renewable energy will account for 8% of the alternatives to conventional energy used in buildings by 2025. Given signatories to the Paris Agreement will in 2024 start reporting transparently on their progress in mitigating climate change, the real estate sector is in the spotlight of politicians and regulators, experiencing continuous pressure to ramp up mitigation efforts. The number of ESG and impact products is expected to rise and sustainable strategies will accelerate even further. With higher standards ahead, the real estate industry should already be going “the extra mile” beyond purely complying with regulations to reduce the foreseeable cost.
Apart from aligning with the regulations, sustainable development efforts will set the foundations for a future-proof organization and accrete competitive advantages. With comprehensive ESG strategies, not just in relation to the environment but also with respect to the social impact of real estate projects, organization's attractiveness to various stakeholders, from employees to investors and tenants, will increase.
The COVID-19 pandemic has also increased the attention stakeholders pay to the social aspect of ESG. The public does not simply expected corporates to help their internal staff overcome difficult times, but also expects real estate firms to make a greater contribution to their communities. This can include providing rent relief to tenants, especially SMEs, or assisting in the production or distribution of personal protective equipment. Today, the social efforts of companies increasingly influence stakeholders' decision-making.
Many investors have high expectations of companies' ability to safeguard the well-being of their employees, operate stably amid economic disruption, and achieve their ESG goals. According to research by GRESB, the share of investors who pay attention to environmental and social data has grown by 22% from 2019 to 2020. This demonstrates that ESG standards will increasingly affect real estate valuations, resulting in greater differentiation in the performance prospects of assets with well-aligned ESG credentials and those that fall short in the eyes of investors, which will have less resilience and run the risk of value erosion.
A sound ESG strategy not only attracts investors but also customers and employees to real estate companies. According to Deloitte's article, ESG Strategy: Turning crisis into opportunity under the pandemic, there is 66% percent of customers are willing to buy more expensive products if these have sustainable elements, and 75% of millennials would be willing to take a salary cut to work for a company that contributes to the local community and fulfills its commitments. This implies that incorporating social considerations can enhance companies' reputations, and that neglecting social elements can lead to higher employee turnover and increased operating costs, and potentially threaten the ability to operate.
Despite this, only 30% of respondents to Deloitte’s CFO Survey consider improved disclosures of social factors as crucial, versus 48% for environmental factors. This implies that the industry should consider more social elements when forming decisions and strategies. Although it can be difficult for firms to spend extra resources on social contributions amid economic disruption, there is evidence that economies tend to recover when there are fewer government restrictions. Therefore, corporates should take the initiative to enhance social engagement to fulfil stakeholders' expectations, rather than focus only on addressing existing challenges and strengthening viability.
Compared to the environmental and social aspects of ESG, governance often receives less attention from stakeholders, especially when there are no business incidents to raise the alarm. However, governance scrutiny is central to companies' ability to continue their business operations. Boards approve and monitor companies' policies and mechanisms. Management teams implement these. It is therefore essential that boards and management teams have a sufficient understanding of compliance, ESG issues, and climate-related risks. Not addressing governance considerations can pose a severe risk to businesses, ranging from penalties and fines, to a loss of reputation and market penetration. A corporate culture of ethics, compliance, and integrity is the foundation of creating positive long-term impacts.
Although environmental issues are of particular importance in the real estate sector, ESG goes beyond the isolated consideration of "E". As described above, the role of social and governance elements should not be underestimated, and low awareness of these areas can be risky. Therefore, real estate companies need to adapt comprehensively to changing investor, consumer, and commercial expectations—ensuring stakeholders and the public accept their business practices and operating procedures.
In April 2022, Deloitte China issued the Creating Sustainable Value: Real Estate and ESG report, as part of our ongoing exploration of how participants in the real estate industry are supporting sustainability and pursuing sustainable development. Below is a case study of the commitments and returns experienced along the sustainability journey of a Chinese real estate enterprise, Longfor Group, in supporting these theories. With its vision of "For You Forever", Longfor has engaged in real estate development, commercial property investment, and other businesses across China since 1993.
Sustainable development concept
Longfor Group believes in “pursuing a slightly higher level” as part of its long-term, sustainable development journey, aiming to achieve incrementally higher standards than those set by the state and regulatory bodies. It emphasizes not just environmental factors, but also comprehensively embraces social and governance issues, as illustrated below:
Supporting green buildings
Longfor Group applies the concepts of "low-carbon, green, and healthy” to the full lifecycle of its buildings. As of 2021, all new projects and 499 ongoing projects of the Group meet green building standards. In June 2021, Longfor first participated in a GRESB assessment and received an industry-leading three-star rating. The following are two examples of its three-star green building projects:
Hangzhou Fengshouhu Program
The Program is equipped with an indoor transitional season ventilation system for cooling and a carbon dioxide monitoring system for indoor air quality. To improve water efficiency, it uses a rainwater harvesting system for non-food used water collection and soil moisture sensors to regulate irrigation frequency.
Chengdu Shuxin Program
Using up to 60% green construction materials, the Program reduced emissions significantly. The thermal performance of its envelope structure saves 5% more energy than is standard, reducing long-term energy consumption. In addition, systems including rainwater harvesting and water reclamation are implemented for water efficiency.
Contributing to society
Longfor Group participates in public welfare undertakings while practicing its "being kind to society" concept and corporate social responsibility. Since establishing Longfor Foundation, The Group has focused on rural revitalization and community development:
Longfor Group has launched four programs to support rural development at multiple levels in different areas.
The Xinya Project helps children from disadvantaged families suffering serious illness. Providing medical check-ups for nearly 6,000 children to identify diseases at an early stage, the Project has helped around 250 people. It also provides training for 200 primary medical staff to enhance their capacity. In education, The Huguang Project manages 30 village schools, providing support to 1,113 teachers and 3,422 students. The Flying Project focuses on young people's career development by providing them with various career opportunities, benefiting more than 500 students. Meanwhile, Longfor’s Stream Project focuses on entrepreneurship and employment for rural disabled people, having helped 4,122 families raise their incomes and benefited more than 10,000 people so far.
A friendly community
In community development, Longfor Group has launched two programs.
The Evergreen Project focuses on the renovation of old communities by upgrading facilities for the elderly. It now covers seven cities and has improved the lives of 25,000 residents. The Chongqing Special Fund has donated more than RMB200 million to support the renovation of old urban communities and revitalize rural areas in Chongqing.
Implementing ESG governance
Longfor Group is committed to a top-down ESG governance culture that demonstrates the importance and its commitment to ESG. It has established an ESG committee at the board level, a peak carbon and neutrality team at the Group level, and an ESG working group at the management level.