The development of ESG in Hong Kong Real Estate Industry

Environmental, Social, and Governance (ESG) issues have been brought into sharp focus as a topic of conversation over the last decade, especially in the real estate industry, where developers, regulators, and investors now consider ESG in every aspect of their agendas and seek to build more sustainable communities. In Hong Kong, buildings account for around 90% of electricity consumption and more than 60% of carbon emissions. This means improving energy efficiency and decarbonization of existing buildings have a key role in achieving Hong Kong's Climate Action Plan 2050.

With its vision of Zero Carbon Emissions – Liveable City – Sustainable Development, the Action Plan targets carbon neutrality by 2050. Among its four decarburization strategies, Energy Saving and Green Buildings is the most relevant to the real estate industry. This strategy sets long- and medium-term targets for reducing electricity consumption. By 2050, electricity consumption should be reduced by 30%-40% for commercial buildings and 20%-30% for residential buildings, from 2015’s levels. By 2035, reductions should reach half of these targets, i.e. 15%-20% for commercial buildings and 10%-15% for residential buildings.

To achieve these goals, the HKSAR Government will continue to strengthen regulation, including for buildings and appliances, and promote smart management technologies like Big Data and Artificial Intelligence (AI). It is reviewing Overall Thermal Transfer Value (OTTV) and plans to enhance related statutory standards by 2025 to reduce the consumption of electricity used for cooling. For electricity generation, the Action Plan targets the elimination of coal for electricity generation and expediting the use of renewable energy to 7.5%-10% of the fuel mix for electricity generation by 2035. This implies that the cost of energy generation will increase, and industry and the community will inevitably share that cost. In light of tightening regulations and increasing energy costs, companies should take the initiative to reduce their electricity consumption and decarbonize.

To lower the cost of decarburization, companies should pay attention to buildings' carbon footprints, both operational and embodied. Operational carbon footprint is the amount of greenhouse gases directly generated as a result of building operations, such as air conditioning and lighting, which currently account for 24% and 12% of commercial energy use respectively. Embodied carbon footprint is associated with the production of building materials and products, transport, and construction.

Decarbonization of buildings focuses on operational net zero carbon emissions. For existing buildings, this can be achieved through major renovation, using renewable sources of energy, purchasing "green energy", efficient management systems, and transitioning to non-carbon heating and cooling sources. However, carbon efficiency results are significantly related to decisions taken at the design and planning stage, and is difficult and costly to make substantial changes in a short period of time. Therefore, in addition to low-carbon renovation, the industry needs to utilize other operational solutions to reduce the electricity consumption and carbon emissions of existing buildings.

Deploying Internet of Things (IoT) technology is an effective way to reduce carbon emissions in existing buildings. As the core element of Smart Green Buildings, IoT integrates various devices and enables further data analysis. This comprehensive analysis facilitates quick responses to issues and the adoption of pre-emptive measures. Although IoT enhances buildings' operational efficiency, related systems required a common protocol language and sensors to function and interoperate. It is therefore vital to plan ahead when deploying smart building systems.

To aid the development of sustainable buildings, the Hong Kong Green Building Council (HKGBC) published the Hong Kong Smart Green Building Design Best Practice Guidebook in 2021. The guidebook introduces various smart solutions across six themes: Building Design & Operations, Health & Wellbeing, Energy Performance, Material & Waste Management, Water Performance, and Mobility & Transportation. For instance, Smart Thermal Control and Smart Artificial Lighting enables control of air-conditioning and lighting with mobile devices, increasing the efficiency and removing geographical obstacles to reducing energy wastage. Central units can be adapted to occupiers' needs, so that when they are outside the property, unnecessary installations are switched off, and before they return to the building it is already being prepared.

Investing in new technologies is also essential to managing transition risk. Due to increasing concerns in society, ESG legislation and regulations have developed rapidly in recently years. Hong Kong Exchanges and Clearing Limited (HKEX) has constantly enriched its ESG Reporting Guide, and in November 2021 HKEX released the Guide on Climate Disclosures for Task Force on Climate-related Financial Disclosures (TCFD), requiring firms to disclose more specific information about Governance, Strategy, Risk Management, and Metrics & Targets. This includes various reporting formats, including scenario analysis and criteria for formulating climate-related indicators. These changes in demand and the impetus regulatory measures have given to sustainable investment have had a profound effect on investors’ earnings potential and risk management.

To enhance ESG's transparency and compliance, solid data foundations are required. However, there are several challenges in collecting, harmonizing, and aggregating real estate ESG data. Different data management systems are used across a variety of asset types, including commercial, residential, hotel, logistics, retail, and office developments. Some offices are equipped with IoT technology, enabling more comprehensive data collection, while others are not. The complex nature of each type of real estate makes it more challenging to collect, monitor, and organize their data, which hinders the formulation of effective strategies. The industry need to focus its efforts on these related data management challenges, including agreeing to a single data model and defining key ESG metrics to achieve uniform, transparent reporting on ESG performance.

Corporates can rely on different types of technology to help address the data management challenges for ESG reporting. Some targeted real estate solutions collect ESG data at source, and most of them are cloud-based solutions, which allows business units to assess the platform from various locations. Based on a specified data model, the platform performs basic quality control functions and normalizes data. For broader needs, there are portfolio monitoring tools with modules for ESG data management. These assist ESG data collection and reporting using standardized data sets and customizable dashboards.

New technology solutions and data management services continue to emerge, and the market is likely to develop and propose even more innovative solutions and services in the coming years. However, with these technology enhancements, the ESG reporting landscape and market demand will expand simultaneously. Therefore, the industry should seek continuous improvements in ESG performance and technology utilization.

In April 2022, Deloitte China published Creating sustainable value: Real estate and ESG, the first comprehensive ESG thought leadership report in the real estate industry. The article illustrates how ESG has been incorporated into strategic development in the real estate sector, and several highly experienced Deloitte partners shared their insights on climate change compliance development in China, the shift in focus from compliance to transparency and comparability driven by real estate investors’ data governance, and the emergence of green leases. Deloitte China is dedicated to driving sustainable development and value creation with the real estate ecosystem.

Below is a case study of the ESG strategy of Cyberport, a digital technology community in Hong Kong of more than 1,800 start-ups and technology companies that nurtures Hong Kong’s vibrant tech ecosystem. It is based on interviews with Cyberport’s CEO Peter Yan and COO Howard Cheng.

ESG through Technology

To align with carbon neutrality objectives of the Mainland and HKSAR Governments, Cyberport has blended ESG and sustainability into its campus operations and facilities management. It participates in the 4T Partnership Framework initiated by Hong Kong’s Environment and Ecology Bureau to achieve carbon emission goals by executing action plans and setting targets.

As Hong Kong’s digital technology flagship, Cyberport strives to reduce carbon emissions with technological solutions, including the installation of solar panels to generate electricity, advanced variable-speed chillers to increase efficiency, and further expanding electric vehicle charging capacity on campus to support smart mobility. In its operations, Cyberport works with tenants to rationalize bus routes to minimize unused capacity and on reducing restoration needs to cut renovation waste.

Cyberport’s expansion project is another manifestation of the tech hub’s ESG commitments. It has adopted construction technologies including Building Information Modelling (BIM) with 4D BIM work sequence simulation, digitalized site work monitoring via IoT to enable safer, less wasteful, more cost-effective construction, and a Modular Integrated Construction (MiC) approach that includes transporting materials by sea to reduced neighborhood noise and traffic disruption. Cyberport is also assessing the applicability of smart building management with a data-driven "digital twin" platform to make repair diagnosis and maintenance more precise. Meanwhile, the waterfront park will be transformed into a smart park with ICT and smart living facilities and enhanced by landscaping to create a more harmonious environment for the public.

ESG through Entrepreneurship

Cyberport also encourages its tech community to contribute to ESG development through innovation and technology, towards building a greener society. Apart from providing technology infrastructure for start-ups to develop technological solutions, Cyberport provides an ideal platform for start-ups to test and showcase their innovations in smart building, environmental technology, smart logistics, and smart retail to potential customers. Cyberport also connects start-ups specializing in ESG solutions and explores construction technology with established institutions to incorporate eco-friendly elements into property development that reduce carbon footprint.

According to Peter Yan, Cyberport’s successful start-ups include ESG Matters, Negawatt Utility, and Intelli Global Corporation (IGC). ESG Matters, a Cyberport incubation alumnus, develops data management systems for listed companies to collect and consolidate ESG information from their operations in accordance with the HKEX ESG Reporting Guide. This helps them formulate strategy and has been well received by several listed companies. Negawatt Utility, meanwhile, has created a central platform to enable intelligent building management in ordinary properties, gaining recognition from government and public entities and winning Deloitte’s Rising Star Award 2019. IGC, which is currently being incubated at Cyberport, aspires to enable low-carbon smart building management by integrating the management of energy, asset lifecycles, and facilities with BIM technologies and AI-based analytics.

Setting Sights on ESG Prospects

Addressing net-zero policy, Yan says the HKSAR Government is likely to formulate a detailed plan with input from major participants in the industry and work with industry stakeholders to execute this plan. HKEX’s listed company reporting requirements on ESG complementing government incentives will facilitate acceptance of ESG by the wider community. Yan sees Cyberport as a role model that will inspire peers to follow and drive the entire real estate industry towards ESG. Cyberport will further decarbonize campus management using technological innovations and encourage the start-up community to pursue social innovation, while collaborating with stakeholders including the HKSAR Government, industry, academia, and research institutions to achieve the vision of carbon neutrality.