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Indian CRE Needs To Take Up The Sustainability Challenge

Environmental Social and Governance issues will influence the built environment, as well as investors, who are increasingly considering these non-financial factors as part of their business strategy.

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With concern for the environment mounting every day and demand for sustainability, businesses are increasingly integrating ‘greener’ practices. The real estate sector, one of the largest consumers of raw material and power- responsible for over 40% of the world’s Green House Gas emissions- is perfectly placed to take a leadership role in this move. 

The silver lining is that in the last few years green buildings in India have seen a dramatic increase. Sustainability is now becoming a part of India's real estate DNA, a norm rather than a ‘good to have’.

According to the Urban Land Institute (ULI), commercial tenants consume 40-60% of the entire energy utilized in buildings. Until recently, ‘going green’ was seen as the responsibility of the property owner or operator but that scenario is slowly changing with more tenants making health and wellness, and sustainability a core part of their strategy.

Personal health and well-being along with the desire to work for a company that practices social and environmental responsibility, are key aspects that employees, especially millennials look for today. Workspaces that have good indoor air quality, thermal comfort, optimum lighting, and minimum noise and other distractions will lure employees and improve their performance and cognitive scores, not to forget the tangible benefits of savings in water and electricity.

The business case for going green

Green buildings are a trillion-dollar industry worldwide. Successful adoption of sustainable concepts can help commercial real estate companies become more profitable, and relevant. The US Green Building Council (USGBC) estimates that going green can increase a property’s value by approximately 4%. And from the tenant’s health and wellness point of view, providing a safe working environment has become imperative, especially for the post - pandemic return to the office, and will drive future occupancy.

With CREs leading the trend, green buildings are more likely to drive more tenants. This means better rentals, longevity, sustainability, etc., and the buildings will also attract more quality investors. International CRE investors look for green certifications before investing, and if a building does not get the required certificates in the next five years, it will be difficult to attract investors looking to acquire properties on a sustainable long-term basis.

Encouraging, but still a varied success

As per the ULI report, there are some encouraging signs of how the real estate industry is embracing the Paris emissions goals, and the good news is that some sectors are making more headway than others.

Class A (Class A buildings are the newest, most modern high-rises on the market) billboard is demonstrating optimum sustainability performance, while Class B (comfort and elegant spaces) comes a close second. This higher performance is in part a function of client demand where clients expect the space to be optimized because they pay a premium price for it. Also, front office areas or public-facing spaces are expected to have sustainable design elements such as good ventilation and lighting.

Class C (Regular & functional spaces) and multi-family establishments have made the least progress on sustainability. Here tenants pay a lower price, hence the owners don’t have the same incentive to make the relevant upgrades and investments.

Similarly, while industry players have tended to focus on Scope 1 (direct greenhouse (GHG) emissions that occur from sources that are controlled or owned by an organization) and 2 emissions (indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling) that are more under their control, they will need to shift attention to their wider Scope 3 supply chain emissions ( resulting from activities that are not owned or controlled by the organizations, but indirectly impacts an organization’s value chain) if meaningful headway is to be made.

Further efforts should include partnering with suppliers on issues like circularity, waste reduction and process improvements, and investing in ‘green’ technologies and transportation infrastructure. Enhancing the engagement with owners, occupiers, and investor stakeholders to help highlight sustainability as a value driver for organisations is another priority. The GBCI (Green Business Certification Inc.) considers five key parameters for LEED certification: saving energy, saving water, waste management, reducing carbon footprint, and focusing on the health of the building’s occupants.

Many government buildings in the country have chosen to opt for a LEED certification. Many state governments are offering incentives for the rating system, and government agencies are encouraging property buyers to go for sustainable buildings. India has consistently ranked third (outside of the US) in the annual list of the top 10 countries and regions in the LEED list, according to GBCI (Green Business Certification Inc), that attributes the progress to leaders in the businesses and government, and to property owners who are building green buildings to address some of the most critical social and environmental concerns.

Way Forward to Net Zero

While at the December COP24 gathering in Katowice, Poland, the commercial real estate sector was not mentioned specifically, it became a prerogative for the sector to set a precedent for all industries to follow suit.

This year’s UN Climate Change Conference, better known as COP26 highlighted that while real estate is responsible for around 40% of all global carbon emissions it is also adopting sustainable practices. The industry is trying to move beyond efficiency to take a leadership role in building a future which would have a positive impact on the environment instead of the other way round.

Environmental Social and Governance issues will influence the built environment, as well as investors, who are increasingly considering these non-financial factors as part of their business strategy. This will further expand opportunities to developers and owners to move ahead of mere building labels to better formulate how truly sustainable offices can optimize an occupier’s real estate spend and support their wider aspirations.

While there is still a long way to go, there are positive steps being taken by many real estate players to fight climate change and engender environmental consciousness.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

K Jayakumar

Senior Managing Director, RMZ Corp

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