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Braiden Goodchild, National Real Estate M&A Leader and ESG Real Estate Deals Leader, PwC Canada
Carina Wendel, Manager, Sustainability & Climate Change, PwC Canada
Amid the growing imperative around environmental, social and governance (ESG) matters, key sectors like real estate are seeing a major shift in how to measure value. Canadian real estate companies can expect the momentum to continue to grow as stakeholders look to see ESG issues integrated into the heart of the organizations they do business with.
This includes investors, who increasingly believe companies should embed ESG issues directly into their corporate strategies and who, according to our 2022 Global Investor Survey, want organizations to report the impact they have on the environment or society now and in the future. This means organizations need not only to demonstrate that they’re ticking the ESG boxes—indeed, many Canadian real estate companies are active in meaningful initiatives—but also to fully articulate what they’re doing, the impacts of their activities and how they’re creating value for the business, their stakeholders and society.
Our 2023 Emerging Trends in Real Estate report found that investing in ESG performance is already creating many advantages for real estate companies. Those with a stronger track record, for example, are better able to attract investment from institutional investors that prioritize ESG matters and access preferential loans linked to actions such as greenhouse gas emission reductions or the provision of affordable housing.
But while the real estate sector is becoming more ambitious and skilled at measuring environmental performance, expectations and opportunities around their impact on society are increasing quickly. A key opportunity for real estate companies to create value, especially given their role in addressing a critical societal need like housing, is to quantify in monetary terms an organization’s social impact, which is quickly becoming a lever for competitive advantage and differentiation.
There are many ways for real estate companies to invest in social opportunities that create value, including:
Measuring societal value creation is the critical first step in understanding the impact made by an investment, the associated uptick in enterprise value and the indirect financial benefits resulting from ESG strategies focused on the social pillar. In order to claim that an action is creating value, the impact must be rigorously quantified and attributed to the activity or investment.
Rigorous measurement goes beyond collecting data on the basic inputs and outputs (e.g., spending $250,000 on diversity, equity and inclusion training for 1,000 employees) to measure the outcomes and impacts (e.g., awareness of unconscious bias improved by 35 percentage points, resulting in a 25 percentage point increase in hiring processes deemed fair and transparent, with an estimated monetary value of $750,000 in improved productivity and retention of employees). This is an example of how investments in the social pillar of ESG can be supported by strategy and measurement internally in your business.
When it comes to external social value, the impacts on residents, suppliers and building partners are critical.
What does this look like in practice? A recent example comes from a Canadian real estate organization that has spearheaded initiatives to improve the well-being of its residents particularly through adopting Fitwel (a leading real estate certification platform committed to building health for all). This helped the organization measure the social impact related to health and wellness strategies in its buildings. Supporting this measurement work was recent analysis showing the positive impacts health and well-being strategies have on tenant satisfaction, and in turn, financial outcomes such as higher rents or valuations.
While the links between healthy buildings and human well-being have long been established, this research is significant as it directly shows a positive correlation between the social impact of these strategies, tenant satisfaction outcomes and financial benefits for real estate owners and investors. More specifically, the research used regression analysis to control for other factors while assessing the impact of Fitwel ratings on both net promoter scores (how likely current tenants are to recommend the building) and an increase in rent per square foot.
A real estate owner and developer based in the United Kingdom has taken social impact measurement one step further. Using a widely accepted set of coefficients developed by the Social Value Portal, it has been able to assign a monetary value to the social impact established. For its 2021 social impact report, the organization translated the outcomes already delivered by its programs into an equivalent of about £500,000 by looking at the additional benefit created compared to the status quo.
Looking ahead, the organization found that an ESG strategy that includes combating youth homelessness and access to skills building programs will generate an estimated £10 million in social value. By encouraging supply chain partners to use the same methodology, organizations can ensure the data collected is even more extensive and reliable.
The strategy described above is only one of many existing approaches to total impact measurement. While the monetization of social impact isn’t critical for rigorous reporting on ESG performance to external stakeholders, it has proven very useful in prioritizing and evaluating alternative strategies. This is key to taking a more strategic approach to ESG matters like social impact, which continues to grow in importance for Canadian real estate companies as they navigate today’s complex and evolving business environment.
While our 2023 Emerging Trends in Real Estate report found many Canadian real estate companies are taking a measured approach to ESG matters overall, we believe the benefits of figuring out the social pillar are becoming increasingly clear as organizations deal with intense competition for talent, capital becomes scarce and more expensive and Canada looks for ways to build an extra 3.5 million new homes by 2030. Besides benefiting from the green premium or "greenium" associated with sustainable finance and securing greater access to institutional capital, real estate companies also have an opportunity to future-proof their businesses at a time of financial upheaval by becoming the partner of choice for customers, communities and governments.
The time to act is now, and we’re ready with tools, such as our Total Impact Measurement and Management (TIMM) framework, to help real estate companies move forward on the ESG imperative and harness the opportunities it creates.To learn more about the TIMM framework as well as other opportunities to create a rigorous strategy and measurement approach to the social pillar of ESG performance, please contact us any time.