E, S, or G? The varied effects of sustainability metrics in real estate

A study we recently published explores how ESG metrics influence the financial outcomes of publicly listed real estate companies worldwide, in particular profitability (ROA) and total stock return (RT). The real estate sector, vital to the global economy, is central to the sustainability debate because of its enormous impact on the environment and communities. Despite growing attention to sustainable business practices, the link between ESG and financial performance remains unclear and underexplored in its finer details.

The analysis, covering a seven-year period (2015–2021), is based on a dataset of over 200 companies from all continents. By employing rigorous statistical tools, including fixed-effects regression models and instrumental variables, we sought to deepen our understanding of ESG's financial dynamics.

We used composite ESG scores (on a scale from 0 to 100) to measure companies' environmental, social, and governance performance. We sourced our data from the Refinitiv Datastream database to ensure global reliability and comparability. In our analysis, we controlled for variables such as market capitalization, leverage, and risk, segmenting the sample by geography and real estate activity type (e.g., listed real estate investment trusts (REITs), commercial properties, real estate development, and rentals).

Our findings indicate that environmental performance is positively associated with ROA, while social and governance dimensions exhibit variable or negative impacts. For instance, governance initiatives had a positive effect in Oceania but a negative one in the Americas, highlighting the importance of regional differences.

The environmental and governance dimensions showed a generally positive impact on profitability, suggesting that practices such as energy efficiency and robust governance can reduce operating costs and attract investors. However, the social pillar often had a negative effect, likely due to upfront costs that don’t generate immediate benefits.

Stock market reactions to ESG practices were less predictable. For example, in the Americas, high governance scores reduced RT, while in Oceania, they increased it.

The results provide some valuable tips for real estate professionals:

• Use environmental investments as profitability levers. Investments in environmental sustainability, such as energy-efficient buildings, can lower operating costs and enhance long-term profitability.
• Balance costs and benefits of social initiatives. Social initiatives often involve upfront costs with no immediate ROA benefits, so it’s crucial to consider the sectoral and regional context before implementing them, assessing their return on investments, and clearly communicate their value to stakeholders, as the case may be.
• Establish robust governance to mitigate risks and attract investors. While some governance initiatives may have short-term negative effects, good governance can reduce risks and improve investor perception, particularly in regions like Oceania where this factor is seen as a key differentiator.
• Tailor ESG initiatives to regional and sectoral specificities. Differences in outcomes across regions and segments underscore the need for customized ESG strategies that consider local regulations, market conditions, and stakeholder expectations.
• Prioritize communication and transparency. Comprehensive ESG reporting is essential to highlight the link between sustainable initiatives and financial performance. Effective communication can build investor consensus and stakeholder trust.

Giacomo Morri, Federico Colantoni, and Antonio Maria De Paolis. “ESG performance variability: profitability and market implications for real estate entities in a worldwide context.” Journal of European Real Estate Research, Vol. 17 No. 3, pp. 373-394. DOI: https://doi.org/10.1108/JERER-11-2023-0046.