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The Henley Group (THG) brings you news you can use This is a Part 1 of a 2-Part Series on ESG's impact on CRE.

ESG Front and Center
The term ESG (Environmental, Social, and Governance) first came into popular use in a 2004 report “Who Cares Wins: Connecting Financial Markets to a Changing World,” which was a joint initiative of 20 financial institutions from 9 countries at the invitation of United Nations Secretary-General Kofi Annan (The UN Global Compact, Report 2004).

While interest has increasingly grown since the original publication, the pandemic helped catapult ESG to the forefront for all investors, including the CRE community.

ESG describes a set of factors for measuring the non-financial impact of companies and investments and directly relates to understanding what, where, and how investment capital is being deployed for the socially conscious. 
ESG: measuring sustainability & ethical impact. It's here to stay.
In terms of a CRE loan underwriting analysis, ESG criteria influences an investor’s ability to identify material risks and growth opportunities based on corporate policies and encourage companies to act responsibly.

New investment is finding its way to ENERGY STAR or LEED certified buildings as buildings–where we live, work, and play–account for approximately 40% of energy usage and carbon emissions (International Energy Agency [IEA]. 2018 Global Status Report. Towards a Zero-Emission, Efficient and Resilient Buildings and Construction Sector).
Owners & developers: fighting climate change is irrefutable.
Change is Here
Many real estate companies, government agencies, and banks are paying close attention to the role the built environment is playing in ESG and changing their habits.

Both Freddie and Fannie have had active programs in place to promote ESG, fueling a “green” bond market. According to Tom Fink (Trepp. July, 7, 2022. ESG Commitments Expected to Surge in the CRE Space), agency green bond programs look to reduce the environmental impact of multifamily housing through energy efficiency, water conservation, and other property improvements and infrastructure.

In fact, a recent survey completed by CREFC found: 56% of respondents reported the existence of an ESG framework within their organization up from 47% from a previous survey. However, there is a long road ahead. Currently, Green bonds are not priced richer because they are sustainable, but there is a slight increase in value due to demand. The oversubscription of the bonds increases value by an average of 2-3 basis points in the US, with Europe commanding 10bps higher for bonds considered “dark green” (KBRA Releases: June 16, 2022. CREFC June Conference, 2022 [Sustainability Summit]).

Regardless, ESG is here to stay and CRE investors with an inclination for sustainability should keep their eyes open for these unique offerings.
Next week in Part 2, we take a more detailed look at ESG specifically as it relates to CRE and the long term impact on owners and developers.

ABOUT THE HENLEY GROUP

We are expert CMBS Borrower Advocates with extensive experience partnering with clients to catalyze loan resolutions. Dedicated to service excellence and outstanding outcomes, we have worked out over $10 billion in CMBS deals to date. We are proud of the deep relationships The Henley Group has forged with Special Servicers for nearly 15 years. Our unique skill set, patient negotiating style, and understanding of Special Servicing allow us to get results that may not be available to you.
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Call David Arthur (617) 719-1087