Leveraging ESG in Real Estate to Promote Sustainable Urban Planning
- Mai Nguyen
- Mar 23
- 6 min read
Updated: Mar 27
The real estate industry is a crucial part of the economy due to its significant capital holdings and its close relationships with other industries in its supply chains. When the real estate industry slows down, it can lead to difficulties for these other industries, resulting in a collective downturn that can have negative effects on the economy. Ensuring sustainable development of the real estate industry is therefore vital for promoting sustainable urban growth and supporting the overall economy.
ESG stands for Environmental, Social, and Governance, the concept started in the finance industry to emphasize more responsible investment activities without sacrificing financial performance. Environmental criteria cover major issues including climate change and GHGs emissions, pollution, energy and water consumption, biodiversity, and waste management. Those environmental elements consider both the impacts of a business on the environment as well as the environmental risks facing the business. The social category usually evaluates corporations’ consideration towards their employees and people living in the surrounding communities with which their business has a relationship. The social criteria ensure basic human-related matters such as human rights, labor standards, DEI (diversity, equity, inclusion), data privacy, and community relations. The last pillar, governance, addresses corporate structures that demonstrate that enterprises are transparent and well-managed. Despite its definition, ESG is an evolving concept; its application in different industries therefore flexibly touches on the most relevant environmental, social, and governance issues in that sector.
ESG in the real estate industry goes beyond the abovementioned general metric, which refers to a range of practices that promote sustainable urban development. These practices can address issues such as housing, traffic, and pollution. While green building is a prominent concept in sustainable real estate, ESG covers a wider range of important areas and offers an opportunity to advance sustainability standards in the built environment sector. This article will explore the E, S, and G components and explain how they can be applied in the context of real estate and urban planning. By applying these principles, real estate developers and urban planners can create more sustainable, livable, resilient, and equitable cities.
Environmental
Buildings are responsible for 40% of the world’s total GHGs emissions and approximately 40% of energy consumption; greening this industry is inevitable. Over the past decades, the concept of green building has gained widespread acceptance and adoption in the building industry as a new standard. Green building design starts from the site selection phase and continues throughout the construction and operation phases, shaping greener physical characteristics of the built environment. Green-certified buildings save 15%-30% on energy consumption, use 20%-45% less clean water compared to typical buildings, and produce no harmful refrigerant gas emissions. In addition to their environmental benefits, LEED or BREEAM-certified buildings also offer occupants healthy indoor environments. These buildings are designed to eliminate toxic building materials, supply sufficient fresh air, and ensure thermal comfort, all while consuming less energy through the use of new technologies such as smart sensors. As a result, occupants of green-certified buildings often experience improved productivity and an overall better quality of life. Some other green building design philosophies, such as privately owned public use open spaces, green transportation facilities, can help improve the community’s wellbeing. ESG investing in real estate has gained significant attention in recent years. Green building practices address many environmental and some social factors. To create more sustainable urban environments, it is important to prioritize the "S" and "G" components of ESG, in addition to the already-focused-on "E" component. This will help to unleash the full potential of ESG investing.
Social
The social aspect of real estate development is often overlooked, but it can add significant value to urban growth. In other industries, social factors often relate to welfare policies for employees and the relationships that enterprises have with the local communities where they operate. Real estate is a human-centric industry that is closely tied to urban spaces. These spaces are where people live and build economic and financial centers, and where our cultures originated. The social pillar of real estate encompasses current urban issues such as affordable housing, housing security, urban segregation, and inequality. These issues are interconnected and have a profound impact on the sustainability and livability of cities. The current ESG boom offers an opportunity to address the affordable housing crisis. By ensuring that investments in housing contribute to affordable and secure housing, we can seek better solutions to this problem. Other social contributions can include investments in healthcare, education, and civic facilities such as parks, museums, and cultural centers. ESG practices also emphasize climate resilience, which can help properties in climate-threatened areas continue to function in extreme weather conditions. By focusing and promoting ESG, we can achieve larger, more positive environmental and social impacts on building livable and equitable cities.
Governance
Dealing with larger-scale issues requires greater efforts from multiple stakeholders. Therefore, the governance component of ESG plays a more significant role in the real estate industry than it does in the common definition of ESG. To address the housing crisis and other urban problems such as pollution, social exclusion, and a poor infrastructure system, there is a need for a collective effort from policymakers, local governments, private owners, developers, and community leaders. By working together, these groups can leverage the unique advantages of ESG in the real estate industry to tackle these issues and make progress in solving these challenges. As such, governance in this context is not only about managing a business, but also about collaborating with other institutions to achieve social and environmental goals while maintaining an adequate return on investment. Inclusionary zoning, a regulation being practiced in some states such as Massachusetts, can be an option to consolidate ESG values and promote social impacts. Or in Boston, there is a project where community leaders, real estate developers, and local authorities are joining together to connect isolated green spaces in the city to form an integrated greenway system. This aims to make the city more accessible, environmentally friendly, and optimize the value of public land. This could also lead to a redistribution of real estate value and improve affordability.
Current Practice to Incorporate ESG
More than 80% of Real estate investment trusts (REITs) ($4.5 trillion in the U.S. as of year-end 2021) incorporate ESG into their investment process, as reflected in their ESG or sustainability reports. However, many companies have not established a rigorous framework for consistently applying ESG principles in real estate deals. This lack of a systematic approach can hinder the ability of REITs to effectively incorporate sustainability into their operations and investments. Considering sustainability or ESG strategy at the early stages of a project is more efficient and effective than scattered efforts later on. And by doing so, environmental, social, and financial returns can be improved. Additionally, measurement is crucial. The lack of relevant and high-quality data is often cited as the top challenge facing real estate investors and developers. To make better-informed decisions and measure progress, there is a need for high-quality data. This can help these investors to effectively incorporate sustainability into their operations and investments, and improve environmental, social, and financial returns by having relevant inputs and by measuring and monitoring performance.
Cities in Vietnam are undergoing transformations to accommodate a growing population. The number of green buildings is increasing, and the country is ready to quickly adopt emerging technologies.
Opportunity in the Global South
The ESG movement is not limited to Europe and North America. While there may be differences in geopolitical, economic, cultural, and legislative factors, a similar momentum for ESG practices is also being observed in developing countries. Vietnam, for example, has a rapidly growing real estate market due to its high urbanization rate of almost 40%. The integration of ESG practices in this frontier market offers diverse opportunities to generate both social impact and financial returns. Cities in Vietnam are undergoing transformations to accommodate a growing population. The number of green buildings is increasing, and the country is ready to quickly adopt emerging technologies. The Vietnamese government is committed to promoting green growth and has released a number of regulations and legal frameworks to support sustainable development. This creates opportunities for collaboration in sharing knowledge, experience, best practices, and case studies, which can lead to investment and other business opportunities. It is worth noting that Vietnam is among the top five countries most affected by climate change, and as a result, the country faces numerous challenges in addressing this issue. The Mekong delta region has been heavily impacted by climate change, therefore, there have been many studies conducted on climate adaptation in this area. Providing secure housing is essential for supporting climate-vulnerable communities. In light of these developments, ESG in real estate has become a highly relevant topic in recent years in Vietnam. Climate risks, such as flooding, are now increasingly being considered during the early design stages, indicating that this industry is evolving. This demonstrates a shift towards a more proactive approach to addressing climate risks in the design and development of real estate projects in the country.
Ultimately, real estate is a long-term investment that requires a long-term strategy, and this is where ESG plays a significant role in meeting our resilience and net-zero targets.
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