How can ESG be profitable for real estate? 

Despite increasing evidence of the benefits of environmental,social, and governance (ESG) initiatives, real estate companiescontinue to take a passive approach. A recent DeloitteCanada survey(1) reveals that commercial real estate ownersare lagging in giving strategic importance to ESG efforts, evenas tenants demand more ESG insights and services—and arewilling to pay for them. And it could be that commercial realestate owners and developers may be missing an opportunityto generate new revenue via ESG initiatives and could directly improve profitability. 

Making the case for ESG

The real estate industry continues to receive increasedempirical evidence about the benefits of smarter and greenerbuildings and investing in ESG initiatives. For instance, smartgreen buildings can help to reduce up to 30% of water usage,40% of energy usage, and 10% to 30% of overall buildingmaintenance costs.(2) Studies also show that smart-greenbuildings can provide 11.8% higher lease value with 5% to35% higher sales value.(3)

According to a 2022 Deloitte Canada study, ESG performanceis starting to have a measurable impact. The analysis of 250real estate companies globally, found that in 2020 and 2021,a higher percentage of real estate companies exhibited anincrease in returns and valuation when their ESGperformance rose compared to when it fell. In other words,an improvement in ESG performance may be starting to showa positive correlation to returns and valuation.(4)

However, real estate companies appear to be focused ondoing just enough in terms of resource efficiency and regularreporting to avoid loss of value, ensure compliance, andposition themselves favorably in the market—instead of anactive approach that considers ESG as an opportunity andvalue generator. For instance, the Deloitte Canada survey (5)shows that over half of commercial real estate owners facechallenges in organization-wide acceptance of having ESGdrive enterprise value in the long term. Further, only 38% and34% of owner respondents have or plan to have an ESGdedicated board member and a chief sustainability officerposition, respectively.(6) And only 26% have a decarbonizationstrategy and emission reduction goals for 2030.(7)

Accessing untapped value

The Deloitte Canada survey found that commercial real estatetenants are looking to prioritize the capture of environmentalsustainability data as they reduce their carbon footprint andadvance towards net-zero. And more than half of tenantrespondents want to capture data on their energy and waterconsumption, waste management, and carbon emissions ofthe buildings they occupy.(8) Further, a majority of tenantrespondents are willing to share their ESG data with landlordsand expect ESG transparency from landlords as well.(9)

This pursuit of data offers an opportunity for owners toprovide diverse services, enabled by technology, that can helptenants in their ESG journey while generating new revenuefor themselves. In fact, a majority of tenants are interested innew “as-a-service” models if provided by landlords. Fifty-sixpercent of tenant respondents are interested in “energy andwater management-as-a-service” and are willing to pay forfacilities such as onsite and renewable energy, water usagemonitoring, and rainwater harvesting.(9) Forty percent oftenant respondents are also interested in “lighting-as-aservice” where they pay for lighting but not for fixtures.(10) Inaddition, owners can generate new income by aggregatingand sharing data-backed insights (data monetization) withtenants to help them make more informed decisions aroundresource usage and their carbon footprint. 

Owners can also generate revenue by selling carbon credits,which they earn after reducing their carbon emissions orinvesting in initiatives around renewable energy andreforestation. And owners and developers can tap intodifferent climate incentives, rebates, and funding programsoffered by all levels of government. This can help offset someof the costs of investing in sustainability initiatives andcontribute to the bottom line of real estate companies.

Changing the mindset

The open secret to ESG profitability may lie in changing themindset of real estate companies and considering ESG effortsas an opportunity to help improve operational efficiency,boost revenue, and increase valuation and returns. Realestate companies should evolve to leverage new technologiesand business models around ESG initiatives to help make astronger business case and remain relevant to theircompetition and stakeholders. For more detailed insights onhelping to chart a profitable and revenue-accretive pathacross the real estate life cycle of design, build, and operate,please refer to Deloitte Canada’s report on the future ofsustainable real estate.

Endnotes

1. In November 2022, Deloitte Canada surveyed top executives from100 major Canadian real estate owners and tenant companiesand asked the survey respondents about the current state andtheir expectations for real estate fundamentals, capital markets,leasing, digitization & smart buildings, real estate-as-a-servicemodels, data, and ESG in 2023 and beyond. The report on thesefindings will launch in June 2023.

2. Rasa Apanaviciene, Andrius Vanagas, and Paris A. Fokaides,“Smart Building Integration into a Smart City (SBISC):Development of a New Evaluation Framework,” MDPI, May 1,2020.

3. John Hatcher, “Financing smart buildings – delivering value in the“new normal,” Smart Buildings Magazine, June 22, 2021.

4. Marco Macagnano and Saurabh Mahajan, “The future ofsustainable real estate is smart: How to convert decarbonizationand net-zero challenges into new and profitable opportunities,”Deloitte Canada, December 2022.

5. In November 2022, Deloitte Canada surveyed top executives from100 major Canadian real estate owners and tenant companiesand asked the survey respondents about the current state andtheir expectations for real estate fundamentals, capital markets,leasing, digitization & smart buildings, real estate-as-a-servicemodels, data, and ESG in 2023 and beyond. The report on thesefindings will launch in June 2023.

6. Ibid.

7. Ibid.

8. Ibid.

9. Ibid.

10.Ibid.

11.Ibid.