The Proptechs Impacting "G" in ESG

Published on
June 19, 2024
June 6, 2024

Introduction

In ESG, 'G' stands for Governance. It serves as the connecting thread that binds Environmental and Social aspects together, providing a foundation for their evaluation.

The World Economic Forum has identified the following factors for companies to consider in their corporate governance practices. While these provide a general outline, this list is in no way all-encompassing and companies operating in different sectors need to prioritize different factors.

Factors for companies to consider in their corporate governance practice
Factors for companies to consider in their corporate governance practices. (Source: WEF)

For instance, quality control and assurance in the pharmaceuticals and technology sectors involve distinct measures but aim for similar end goals: human safety and satisfaction. In the pharmaceutical industry, maintaining high standards of care and patient safety is paramount. This includes ensuring new drug development avoids unpredictable side effects or long-term adverse effects. In the technology sector, quality control and assurance focus on ensuring the reliability and performance of products and services, particularly in applications where technology impacts human safety.

Different areas of priorities for these sectors include external stakeholder satisfaction for pharmaceuticals, particularly amidst scrutiny over waste disposal, and data privacy for technology, especially in light of recent data leak controversies. Ensuring ethical disposal of biowaste is crucial for maintaining public trust in the pharmaceutical sector while protecting user data from breaches is essential for maintaining confidence in the tech sector.

The figure below provides an overview of the different levels of materiality of ESG factors for the real estate development and the oil and gas drilling sectors:

Levels of Materiality of ESG Factors for real estate development and the oil and gas drilling sectors
Levels of Materiality of ESG Factors

Why is it important for real estate?

The decarbonisation of real estate has been a significant focus over the past decade and will continue to be a priority moving forward. As companies are increasingly pressured to set net-zero targets, corporate governance plays a crucial role in this transition, for both owners and occupiers.

For real estate owners, governance is key in establishing clear strategies, targets, and roadmaps for decarbonisation. This includes defining management and board roles and responsibilities and tying decarbonisation to remuneration and accountability policies. Effective governance ensures that owners can accurately measure and report their decarbonisation progress, which is essential for driving the business toward its long-term goals.

Occupiers are prioritising real estate assets that do not face the risk of obsolescence or turning into stranded assets due to carbon-related emissions. They are seeking evidence that companies are prioritising decarbonisation. Therefore, occupiers need to have robust governance policies in place to ensure they are selecting and investing in properties that align with their own decarbonisation goals and commitments.

How does Proptech fit in?

Several Forbes Global 2000 companies have made climate pledges that will be due in 2025. Therefore, in 2024, the majority of the focus for large corporations will be on assessing the progress towards these pledges. With global regulatory compliance laws tightening, especially surrounding ESG reporting, we might witness increasing stakeholder scrutiny of board oversight.

The fact that buildings account for approximately 40% of all carbon-related emissions is thrown around a lot. Since the world’s largest firms tend to have large real estate footprints, it is important for them to accurately monitor, mitigate, and report their emissions. At The PTC, we have identified 2100+ proptechs that are focused on environmental reporting, the majority of which serve as emissions management and tracking systems through the use of IoT technology.

We are also seeing an increasing number of Proptechs within this space streamlining reporting processes for said emissions which allows companies to save time and efficiently track progress. Combined with the ever-increasing capabilities of AI, companies can leverage these technologies to form robust governance policies, identify gaps, and monitor progress.

Major building management system (BMS) techs are increasingly integrating with EMS techs and providing means to accurately report ESG performance according to the most commonly used frameworks such as the CDP framework, GRI Standards, SASB, and IFRS Sustainability Disclosure.

ESG compliance is demonstrating an increasingly positive impact on corporate financials and investment returns and this momentum is expected to continue. Therefore firms need to ensure accurate monitoring and avoid greenwashing claims.

ESG Impact on Corporate Financials vs Investment Portfolio Performance (2015 – 2020)
ESG Impact on Corporate Financials vs Investment Portfolio Performance (2015 – 2020) (Source: ROBECO)

Integrating Proptech for real estate management also serves the function of allowing property management to stay ahead of any changes in regulations and ensure regulatory compliance at all times. The automation of compliance reporting and real-time +predictive analytics can save significant amounts of time and allow for better allocation of resources.

Conclusion

The relationship between the financial performance of a company and its ESG metrics has been studied extensively with most studies indicating a positive relationship between valuations and high ESG disclosure scores.

ESG disclosure scores vs P/B ratios of Hong Kong-listed property developers
ESG disclosure scores vs P/B ratios of Hong Kong-listed property developers (Source: JLL)

95% of millennials are interested in sustainable investing and 67% believe that investing is a way of ‘doing their part’. The increasing emphasis on accountability and transparency related to ESG metrics highlights the importance of robust corporate governance policies.

We expect to see a growing focus on standardised ESG reporting which will be enabled and streamlined through Proptech for companies with large real estate footprints. These companies can leverage Proptech to stay ahead of the curve and benefit from the well-documented positive impact of strong corporate governance.

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