ESG Due Diligence Considerations Real Estate
Making ESG an integral part of the due diligence process saves time, money and allows for better investment decisions. Here are four steps to consider when integrating ESG in the process.
Jonathan Eade
ESG Lead
ESG as part of the due diligence process is an increasingly important aspect of real estate investment and development, particularly in light of recent legislative moves such as SFDR and increased rules on energy efficiency. If properly structured it can help investors and developers identify and mitigate risks, enhance sustainability, and improve the overall performance of a project. Positive ESG credentials of a building or project are also playing an increasing role in boosting rental yields and valuations.
There are several key steps involved in intertwining ESG themes within the normal ,due diligence process effectively. When defining the scope of any due diligence questionnaire you should at first determine what specific ESG issues are material to the project or building in question, and in what sections of the normal DD they should fall. Energy efficiency, water conservation, waste management, and social impact should all be high on the list. Background information such as public records, environmental assessments, building certificates or pre-assessments and previous stakeholder consultations also make good starting points, but what should you consider after that?
- Identify what data you require and where to find it. Along with being accurate it should also be granular, up to date and relevant to building or portfolio at hand.
- Analyse and assess the data: this will tell you how a building operates, where resources are wasted and show up inefficiencies. At this point you should be able to identify any potential risks or opportunities related to ESG issues too.
- Develop a plan to mitigate the risks and capitalise on any long term ESG opportunities. This may involve implementing specific measures or strategies, such as planning to install energy-efficient systems or engaging in stakeholder consultation. You can start to look at the cost of these remedial measures and plan properly.
- Monitor and report on progress: considerations for how you go about doing this should be part of the DD process too. In the event you decide to proceed, this will need to be done on an ongoing basis and is crucial to ensure that the project remains on track to meet its ESG goals and objectives over time. This may involve setting additional targets, using benchmarks to track progress, and regularly report on such actions to stakeholders.
Robust ESG due diligence processes and subsequent pre-planning will serve you well and also ensure you go into an investment or project with most potential ESG risks, remedial measures (and opportunities) already identified. Given the wave of legislation, particularly when it comes to financing projects or investing in real estate projects, it essential you have this well covered or the economic and reputational costs to you could be substantial.
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December 31, 2021
