ESG investing is not a fleeting trend or fad, but a lasting investment strategy. This niche investment approach has gained popularity, emerging as a pivotal focus for many investors. According to Deutsche Bank, ESG investments globally are projected to soar beyond an impressive $100 trillion by 2030.
Investing in sustainability means more than just financial returns. It involves driving significant societal and environmental change. For investors, it’s not only about making a statement about the environment but also a strategic necessity. By embracing sustainable investments, investors recognize the opportunities of adopting eco-conscious construction and green practices. Incorporating smart technologies into properties helps preserve the environment and enhances asset value while adapting to evolving market preferences.
This article discusses the rise of ESG investing, the nuances of these investments, and the substantial traction ESG investments have gained.
ESG Investing
ESG investing stands for Environmental, Social, and Governance investing. It’s an investment approach that considers financial factors and ESG criteria.
To qualify as an ESG investment, a company must adhere to specific criteria across three key areas: Environmental impact, Social responsibility, and Governance practices within its organizational structure and operations.
Environmental Impact Criteria:
A company must perform as a steward of nature, including its carbon footprint, energy efficiency, and resource use.
Social Responsibility:
Evaluates how a company manages relationships with its employees, suppliers, investors, and communities.
Governance Practices:
Examines the quality of a company’s leadership, management structures, and internal controls.
ESG-focused investors incorporate ESG factors into their investment decisions. They seek sponsors who demonstrate responsible business practices and contribute positively to society and the environment while aiming to achieve financial returns.
How ESG Investments Are Rated
ESG research firms generate scores for various companies, offering a convenient metric for comparing different investments. These scores serve as ratings assigned by research firms to individual companies, reflecting their environmental, social, and governance performance.
The scoring system for ESG faces two primary challenges. Firstly, ESG ratings and metrics lack government regulation, which may lead to inconsistencies and variations in evaluation standards. Secondly, ESG factors aren’t universally applicable across all business sectors. For instance, while carbon footprint is pertinent to industries like manufacturing, it holds little relevance in sectors such as insurance.
While the specific criteria evaluated may differ from one company to another, ESG rating firms typically examine a range of factors including annual reports, corporate sustainability initiatives, and board composition. They also assess the management of resources, employee relations, compensation practices, and financial performance.
ESG in Multifamily Real Estate
ESG has become an increasingly important focus in the multifamily sector. While conservation efforts, green building initiatives, resident services, and fair business practices have long been important, recent catastrophic climate events, the impact of COVID-19, social movements, investor activism, and the growing influence of millennials have all contributed to the increased attention to ESG at the property level.
Multifamily real estate properties are seeing an uptick in incorporating smart technologies, some examples include; Nest thermometers, EV charging stations, and HVAC systems. Findings from a study conducted by Apartment Data reveal that 61% of apartment renters are willing to pay increased rents for the opportunity to live in more environmentally friendly apartments.
Advantages of Smart Apartment Buildings
The market for smart buildings is projected to quadruple by 2029, fueled by the undeniable benefits. Here are some of these advantages:
Enhanced Energy Efficiency
- By automating HVAC and lighting systems in a building, it is possible to reduce energy consumption by approximately 23%. Smart technologies not only lower the building’s carbon footprint but also help to save a considerable amount of energy. This contributes positively to the environment while also having a positive impact on your financial bottom line.
Lower Cost of Living
- Smart apartment buildings are designed to minimize the need for onsite operations, which in turn reduces management and maintenance costs for property owners. This reduction in operational expenses results in a more affordable cost of living for tenants, leading to higher levels of satisfaction and increased occupancy rates.
Streamlined Management Operations
- Smart buildings require smaller teams to oversee operations, integrate property functions, and create a seamless experience for tenants and property managers.
Enhanced Property Value
- Multifamily smart buildings are attractive to higher-paying tenants, leading to increased property values. In addition, these buildings offer a premium living experience, resulting in increased satisfaction among current residents.
ESG & Viking Capital
Viking Capital takes pride in its commitment to promoting environmental sustainability, championed by our co-founder and COO, Ravi Gupta. He acknowledges, that ESG initiatives have stirred controversy in certain circles, often viewed as burdensome with minimal financial returns. “At Viking, we see it as a huge opportunity. The Inflation Reduction Act has allocated tremendous financial resources to environmental initiatives, resulting in a high return on investment. We promote sustainability and profitability by adopting practices such as solar power, energy and water conservation, and energy-efficient building designs. By prioritizing the wellbeing and health of our tenants, we strengthen the community and foster their desire to live and stay there, which also translates into a higher ROI.” Ravi is a passionate advocate and believes that a better tomorrow starts with each of us.
Underwriting Challenges of ESG Investments
Many sponsors face hurdles when underwriting ESG initiatives into multifamily syndication or development deals. Throughout the underwriting process, the immediate benefits often appear overshadowed by the financial impact on overall performance. This struggle leads many sponsors to hesitate to implement significant initiatives such as solar installations, automated HVAC systems, or water conservation measures. However, a long-term perspective on underwriting is essential to recognize the substantial financial advantages that stem from these accommodations. The appreciation resulting from these elements can far exceed the initial implementation costs.
Additionally, considering the tenant base is crucial for long-term success. With the majority of renters falling in the 20-30 age range, it’s clear that millennials and younger generations are spearheading the prioritization of sustainability in the market. As more tenants actively seek out eco-friendly properties, the demand and occupancy for apartment communities offering such amenities will ultimately rise.
Final Thoughts
As ESG investing transitions from niche to mainstream, the demand for sustainable accommodations in multifamily investment opportunities is expected to surge. Already, there’s a noticeable uptick in interest from large family offices integrating ESG principles into their investment strategies.
At Viking Captial, we are building our sustainability track record so we can offer investors a new way of investing in the future. Additionally, we aim to leverage the exclusive benefits offered by lenders to businesses committed to sustainability, including specialized terms such as green loans.
