By Nicholas Leider
EMPHASIZING THE ‘ E ’ IN ESG
Sustainability and green building practices are becoming top priorities for developers , tenants , and investors .
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Commercial real estate is finding out just how essential ESG — environmental , social , and corporate governance — policies can be . Tenants are looking for sustainability while various levels of government are passing regulations to boost green building practices . In the ultra-competitive world of CRE , an environmentally conscious approach can help separate one asset from another .
David Amerikaner , special counsel with Duane Morris ’ s Real Estate Practice Group , focuses on sustainability , land use , project development , and environmental law . He details what commercial real estate is doing in the ESG arena , while also discussing how tenant demand for sustainable practices and shortening ROI on green investment are changing the equation for developers and owners .
CIRE : WHILE COVID-19 DOESN ’ T SEEM TO BE DONE WITH US FOR A BIT , CAN YOU HIGHLIGHT SOME PERMANENT IMPACTS THE PANDEMIC WILL HAVE IN COMMERCIAL REAL ESTATE ’ S APPROACH TO ESG ?
DAVID AMERIKANER : As we know , COVID-19 has been a huge disruptor in every sense and in every segment of commercial real estate . In the office market , in particular , we ’ ve seen companies look to downsize and question their need for as much permanent office space or permanent office space at all . We ’ ve seen this make the office market more competitive than ever . And as landlords compete for tenants , the commitment to ESG , from the perspective of the building owner or landlord , can be a distinguishing factor . First , I want to distinguish what we ’ re talking about here . Mostly , it ’ s the “ E ” in ESG . “ Environmental ” includes the built environment and its materials , the carbon they emit , water usage , waste , energy usage , and third-party certification of various ESG-focused attributes , liked Energy Star and LEED certification . The social aspect — including pro bono work , community involvement , philanthropy , and diversity — is very important . The governance aspect is also key — including initiatives like ethics , codes of conduct , insider trading policies , and succession planning — but I ’ m especially focused on the environmental issues in ESG .
CIRE : SPEAKING OF THE OFFICE MARKET , CONSIDERING THE GROWING COM- PETITION WITH THE DISRUPTION OF COVID-19 , HOW CAN BUILDING OWNERS AND OPERATORS JUSTIFY THE CAPITAL EXPENDITURE IN ESG WHEN THE MAR- KET IS SO CUTTHROAT ?
AMERIKANER : As we see tenants screening for ESG factors , we see investors increasingly screen for sustainability issues . Commercial landlords are prioritizing sustainability more than ever . So when you ask about justifying the cost , in the last few years , the payback period for a lot of investments is relatively short . Green building projects can be as simple as improving lighting and adding automatic switching for climate control . You can get a payback in as little as one to three years . Obviously , there are investments that require a much longer period to recoup your investment , but affordable financing is an option in many cases . We ’ re seeing more and more landlords realize this . Because of the importance placed on these actions by investors and tenants , many people are thinking it ’ s worth it .
It ’ s becoming vital in the capital markets , where people are finding that they have no choice on the demand side of the market . In residential , home buyers are seeking sustainability , but on the supply side , the access to affordable capital depends more than ever on robust reporting of ESG metrics and a measurable commitment to reducing pollution and water use .
CIRE : IN ADDITION TO THE CHALLENGES RELATED TO COVID-19 FOR DEVELOPERS ,
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