ESG challenges and opportunities in real estate

The real-estate sector is particularly important in meeting environmental targets. While a net-zero transition requires robust efforts including potential additional costs and new challenges, becoming more sustainable may also offer new profit opportunities and long-term cost-saving in the future.

While the ‘E’, ‘S’, and ‘G’ aspects of a real estate company’s operations are all crucial, it is typically the environmental impact ‘E’ that draws the most attention. This is primarily due to the significant greenhouse gas emissions generated by real-estate activities and direct links to key areas such as energy efficiency of buildings.

Regrettably, global carbon dioxide emissions continue to climb. According to the International Energy Agency (IEA), they hit a record high of 37.4 billion tonnes in 2023, although the IEA, in its scenario outlook based on today’s policy settings, expects them to peak by 2025.  

The building and construction sector is responsible for 37% of all global carbon emissions (UN Global Status Report for Buildings and Construction). These are made up of embodied carbon from materials, construction, renovation, and end of life of buildings; and of operational carbon, representing emissions during the use of buildings (HSBC Global Research, Real Estate Perspectives: #5: The Carbon Era, 6 June 2023).  

Multi-aspect challenges

Pathways towards decarbonisation in the real estate sector involve several key strategies. Addressing operational energy use such as heating and cooling is key; this represents around three-quarters of real estate value-chain emissions. This could involve transitioning from gas and oil to heat pumps or retrofitting older buildings with improved insulation and energy-efficient appliances. District heating systems and power purchase agreements for renewable electricity from the grid are additional measures to decarbonise energy use. On-site generation of renewable electricity, such as rooftop solar panels, along with energy storage solutions, further contribute to emissions reduction. Additionally, adopting emerging business models like Energy as a Service (EaaS) can optimise energy usage and minimise cost volatility for consumers.

Addressing embodied emissions from materials, construction, renovation, and end-of-life processes is also essential. Using green concrete, sustainable wood, and recycled products in construction, as well as implementing more efficient construction methods and transportation practices, can help mitigate embodied emissions. Increasing the renovation and repurposing of existing building stock can further reduce emissions associated with the real estate value chain.

With the path to decarbonisation touching on almost every part of the real estate sector, this poses various challenges as many factors are not entirely within a company’s control. While various technologies facilitating decarbonisation are available, wider adoption and cost reduction of the technology are needed to achieve the targets.

As outlined in HSBC’s Net Zero Transition Plan 2024, “to accelerate emissions reduction in buildings, new approaches are needed to reduce upfront costs, simplify consumer propositions, and develop supply chains. The role of government is particularly important for residential real estate where millions of individual homeowners are decision-makers, and where social and equity considerations are paramount.” Tackling the embodied emissions in building materials will require not only decarbonisation of the supply chain, but also the development and broad use of new sustainable materials. Net zero cannot be achieved without changes in the real estate industry, as its environmental footprint is too large to be ignored.

However, along with the huge impact and importance of the real estate sector in reducing greenhouse gas emissions come opportunities. According to HSBC Global Research, demand for sustainable real estate assets is on the rise, with occupiers, developers, and investors all pushing for environmentally friendly options (Euro zone and UK Real Estate – ESG Integrated: 10 questions). Real-estate companies are actively enhancing their focus on environmental, social, and governance (ESG) factors in response to climate change and net-zero commitments.

A range of benefits

Having strong ESG credentials can offer several advantages for real-estate companies. Above all, investing in energy-efficient properties and disciplined asset allocation can drive more sustainable revenue growth as more tenants and investors prioritise sustainability, prompting developers to deliver more sustainable properties.

Aligning key performance indicators with ESG priorities could help to foster greater investment and buy-in to sustainability strategies. Board-level accountability and incentivisation such as mandatory metrics for recycling materials from development sites can help promote greener decision-making within real estate companies.

Another benefit can be cost efficiency. Measures such as installing solar panels on rooftops can lead to long-term cost savings and efficiency gains, particularly for warehouse owners with ample flat roof space.

The social impact is also important. Investing in community-led funds and local charities helps businesses foster stronger ties with local communities, benefiting urban development and strengthening their reputation as a responsible partner.

ESG metrics have an increasing impact also on valuation premiums, with initiatives like green leases and environmentally rated buildings often resulting in higher valuations.

Financial encouragement

There is a range of financial instruments aimed at supporting companies on their transition to a smaller carbon footprint. Green loans are similar to corporate loans, but the proceeds are meant to be used for eligible green projects with environmental benefits, such as green buildings that meet recognised standards. Sustainability-linked loans are made available to facilitate and encourage environmentally and socially sustainable economic activities and growth. They can be used for general purposes, with the borrower’s cost of capital linked to related sustainability key performance indicators such as science-based emissions reduction targets. Green bonds finance specific green activities such as renewables.

These and other instruments can play an important role in financing the transition, however, the financial industry needs to continue to improve the robustness of these products. HSBC is working both internally and with relevant industry bodies and standard setters to support this.

For its customers in the real-estate sector, HSBC aims to provide finance and investment to support three key transition outcomes: reducing energy demand, scaling use of net-zero-aligned technologies, and supporting changes in occupier behaviour. HSBC also supports decarbonisation of energy supply with a focus on clean electrification of building heating and cooling, and scaling the use of buildings as an energy generation and storage asset. Finally, the bank encourages smarter building construction and renovation through material use reduction, the use of lower-carbon materials and resilience measures.

To position their business for long-term success, real estate companies will have to retain and further increase their focus on ESG topics, selecting the right partners to help them navigate the challenges and opportunities they face on their path towards decarbonisation.