ESG risk, resilience, and adaptation in real estate: shaping future practices

As the real estate industry grapples with advancing ESG priorities, experts in a recent webinar highlighted the importance of adapting business models and leveraging technology. How can the sector balance immediate financial pressures with long-term ESG commitments, and is the sector doing enough to drive meaningful change?

Key findings from BuildingMinds and GRI Club ESG Leadership Survey

The findings of a recent survey by BuildingMinds and GRI Club on ESG and resilient real estate risks notes a significant lack of confidence among stakeholders. Harvey James MRICS, country lead – UK and Ireland at BuildingMinds, explains around one-third of respondents expressed concerns about engagement and achieving ESG goals, with capital and financing cited as major challenges. Additionally, over 50% of respondents highlighted regulatory reporting and sustainability benchmarking as top priorities.

The real estate sector is still far from being fully resilient to ESG risks

Robbie Epsom, EMEA head of sustainability and senior director at CBRE Investment Management, highlights that while progress has been made, the industry still has a long way to go to achieve true resilience against ESG risks. Robbie adds that ESG risks are now critical to property value and marketability. ESG factors, for the first time, are really starting to drive the value proposition of buildings, he says.

The industry is beginning to embed these concerns into ‘business as usual’, but the road to resilience is long, especially with the majority of European buildings still falling short on energy efficiency. Over 80% of buildings in Europe and the UK will still be in use in 2050. Currently, 75% of these buildings are energy inefficient, according to the European Commission.

Konrad Hedemann MRICS, senior ESG manager DACH andf CEE at PATRIZIA SE, emphasises that the industry is now moving from a preparatory phase into an operational phase. He notes that, in recent years, the groundwork has been laid in defining what ESG means and in establishing common standards. The next step is integrating these into everyday operations.

Konrad pointed out that real estate owners face obsolescence risk if they do not integrate ESG as a core part of their investment and management strategies. He also stresses the competitive disadvantage of failing to keep up to date with ESG standards, as tenants may opt for more sustainable properties that offer lower energy costs.

Adapting business models to keep pace with ESG

Cecile Babcock, head of distribution, Europe, at Cromwell Property Group, takes a deeper dive into how real estate firms are adjusting their business models in response to ESG risks. She breaks this down into three key categories: financial, regulatory and reputational risk. Importantly, institutional investors are increasingly focused on sustainable strategies driven by consumer demand. A recent FTSE Russell survey indicates that 83% of European institutional investors cite client demand as their top reason for implementing ESG practices.

The risk of stranded assets, particularly in underperforming offices, is a growing concern. Cecile emphasises the importance of ‘futureproofing’ investments to prevent assets from becoming obsolete. This includes keeping pace with ESG certifications and anticipating occupier demand, especially as more companies commit to net zero targets.

She shares Cromwell’s approach of repositioning prime office assets in major UK regional cities. By enhancing amenities and improving ESG credentials, these assets stand to capture both rising rental growth and long-term tenant demand.

Strong ESG practices are driving financial success

Roger Baumann MRICS is COO and head product development global real estate at Zurich Insurance Company Ltd. He highlights how, in the evolving landscape of real estate, firms that embrace robust ESG practices are reaping significant rewards, both financially and reputationally. Citing the S&P 500 ESG Index, he notes that companies prioritising ESG often outperform their peers.

These firms not only achieve cost savings through investments in energy efficiency and waste reduction but also mitigate risks associated with environmental penalties and liabilities. Enhanced transparency in ESG reporting facilitates access to diverse financing options, while proactive compliance with regulatory changes helps avoid legal challenges. Moreover, companies with strong ESG credentials attract and retain top talent and foster customer loyalty, positioning themselves for long-term resilience and growth in an increasingly competitive market.

The impact of ESG risk on green investments

As the focus on sustainability intensifies, ESG risk is increasingly shaping the landscape of green investment. Konrad points out that investor interest in sustainable assets is surging. Many investors are integrating ESG due diligence into their acquisition processes to mitigate compliance risks. ‘We clearly can see that the demand for green buildings or green investments is significantly increasing’, he notes.

Cecile emphasises that incorporating ESG into investment decisions has become crucial, stating, ‘this is no longer a niche discipline ... it has to become part of the MO of every investment manager’.

Robbie adds that ESG integration is evolving from a specialty into a standard practice, with new KPIs enabling better tracking and capital for green investments. This shift underscores the growing importance of ESG factors in shaping investment strategies and achieving long-term success.

Using tech-driven solutions to assess and manage ESG risks in real estate

Technology plays a pivotal role in assessing, managing and reporting ESG risk in real estate. Harvey highlights the need for a centralised data system to effectively capture, aggregate and analyse ESG information across portfolios. He stresses that understanding one’s data landscape is essential for informed decision-making. Once complete, you can then move on to the predictive stage to assess risks. From the analysis, strategies can be developed to determine, for instance, where outliers may be, where capital needs to be invested and which buildings are at risk of obsolescence and require attention, he says. ‘What landlords and operators want is the creation of visibility and understanding of where these costs need to be implemented over a particular period in time’, he explains.  Harvey also spotlights the role of machine learning in optimising retrofits and reducing emissions and emphasises that ‘in today's world, you cannot just demolish a building; you have to consider the embodied carbon and find ways to mitigate and manage it over a specific period of the project’.

Robbie states that the real estate sector has historically lacked operational insight, contrasting it with the precision seen in industries like pharmaceuticals. He asserts, ‘we have operated real estate for so many years not knowing this information’, calling for a paradigm shift in how buildings are monitored.

Economic climate and ESG progress

Roger points out that higher interest rates can distract investors from prioritising climate-focused initiatives, saying, ‘economic conditions can also impact a company's ability to manage climate-related risks’. He also states that during robust economic times, companies can allocate resources toward long-term investments that address climate change, while during downturns, short-term stability often takes precedence.

Robbie underscores that a supportive economic and political environment can facilitate sustainable initiatives, stating that ‘if the economic climate is pulling in the right direction, it makes things much easier’. However, when conditions are less favourable, finding opportunities becomes challenging but they still exist, he says. ‘It doesn’t mean we have to stop doing it. It just makes it harder to find those opportunities’.

Elevating ESG standards: the role of professional bodies in real estate

Training and networking are also a crucial part of ESG. ‘Learning from each other ... is very important when it comes to this specific topic’, says Konrad. Robbie agrees, highlighting the need for professional bodies to lend their credibility to the process. Professional bodies can significantly influence the real estate sector by setting standards, fostering collaboration, and enhancing the credibility of ESG practices.

The management of environmental, social and governance (ESG) risks is a challenge familiar to real estate owners, operators and investors. As sustainability policies come into force and regulation intensifies, pressure on industry stakeholders to consider and mitigate a wide spectrum of ESG risks is growing. To secure investment and resilience over the long term, businesses must also consider how these factors may exert influence in the future, adapting their models and processes accordingly.

Our panel of experts review the findings of the ESG Leadership Insights survey to understand where the most pressing challenges are felt in industry across the UK and European region. With consideration of regional head and tail winds, the discussion examines the levers that can enable the sector to become more resilient to ESG risk going forward.

This webinar assesses the strategies that businesses in real estate management and finance are adopting to mitigate ESG risks and capitalise on new and emerging opportunities.