With the rise of ESG responsible investing, modern investors can build a portfolio with a conscience and put their dollars behind causes and platforms that matter. Real estate investors have a unique opportunity to apply ESG principles thanks to transparency that exists in syndications and individual property ownership. Read on to learn how to get started with responsible investing.
Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More.
What Is ESG Investing?
ESG investing refers to investments made with three criteria in mind: environmental consequences, social responsibility, and governance policies. In recent years, Americans have begun investing with businesses that reflect their values, and millennials, rank social responsibility as an essential factor in their investing decisions.
Unfortunately, no official standard or certification exists to discern businesses with high-ESG standards. Similarly, when working in real estate, the individual must use the information available to evaluate the responsibility of the REIT, syndication investment, or individual property.
Environmental Analysis
First, when applying ESG responsibility to real estate investments, consider the project’s environmental impact. Often, essential information will be in a property’s environmental site analysis and green report.
Generally, multifamily projects are considered to be more environmentally friendly than single-family homes because they use fewer resources per unit to be built and then require less energy per person to maintain. When investing through a syndication or by purchasing a property, some other topics to consider include:
- Whether the building materials are sustainably sourced;
- The building’s impact on the local watershed;
- The implementation materials or practices to improve energy efficiency and water conservation.
If investing in a company rather than in a specific project, such as through a REIT, look for the company’s sustainability reports. Research whether it has reduced its carbon footprint and offset its carbon emissions. Additionally, considering the company’s history of U.S. Environmental Protection Agency compliance and mitigation supplies essential information regarding the company’s practices.
Social Responsibility
While the environmental analysis considers an investment’s impact on the Earth, a social study evaluates its impact on people.
Social responsibility factors to consider include:
- Whether the project improves the living conditions of the people living at the property – is it cleaner and safer;
- The project’s overall impact on its community;
- Whether the company gives back to the community; and
- Treatment of company employees
When applying an ESG analysis to REITs or other companies, pay attention to diversity and employee policies and issues.
Increasingly, the social analysis must also include location and the local government’s human rights activities. Projects in some states and countries will have diminished ESG responsibility simply due to location.
Governance
Finally, an ESG analysis considers the governance of the building or project. This analysis focuses on the oversight of the company, executive leadership, political affiliations, and accounting practices. The governance component will be most important when investing in real estate syndications and REITs and include:
- Whether the company uses transparent accounting and reporting practices
- The compensation structure and alignment of the sponsor team with investors; and
- Whether the sponsor contributes their own capital to the project
How to Implement ESG Investing
Currently, two main strategies for implementing ESG investing exist. First, and most common, is withholding investment from companies or projects that do not meet high ESG standards. Second, some investors try to engage in shareholder activism to create change from within through attending meetings, contacting executives, and sending proposals.
Ultimately, ESG-focused investing is highly customizable to each investor’s ESG priorities and local market.
ESG Investing’s Impact on Portfolio Performance
Fortunately, responsible investing using an ESG analysis does not have to hamstring a real estate-centered portfolio. Increasingly, investors are finding that ESG investing yields high returns and lower risk.
Fortune reported on several data sets that documented that companies with high ESG standards significantly outperformed companies on the lower end of the ESG scale. Essentially, the measures and practices valued in an ESG analysis promote greater productivity and profitability for a business.
To some extent, the connection between high ESG standards and good returns is common sense. A company with excellent employee policies is less likely to suffer a major discrimination lawsuit, and a project with high environmental standards is unlikely to be saddled with the costs of cleaning up a toxic site. In many ways, bad behavior is expensive.
Final Thoughts
ESG investing provides an added bonus to those investing in their local markets by screening for projects and properties that benefit their communities. As a result, both our neighborhoods and portfolios can benefit through responsible investment choices.
Kent Ritter is an experienced multifamily investor and entrepreneur empowering you to build real wealth through real estate syndication. Learn More.
