Investors begin to see the importance of credible ESG ratings, but do they know how to implement the right strategy in Hong Kong?
Real estate experts in Hong Kong, like many others around the world, may have been skeptical about the concept of ESG (Environment, Social, Governance) principles and why they need to pay attention to it.
The culmination of UN’s Sustainable Development Goals by 2030, the international drive to get as close to Net Zero carbon emissions by 2050 , and the increase in financial and industry regulation are putting real estate stakeholders under pressure. It means the time for Hong Kong’s investors, occupiers, developers, and landlords to identify and implement substantive ESG policies has arrived. For overseas capital looking to invest in Hong Kong, adherence to such principles is something they have come to expect.
At the same time, despite the plethora of data and best-practice available, theory isn’t the same as actual experience and the expertise on where start for a robust implementation strategy.
"Buildings account for 90% of electricity used in Hong Kong, generating over 60% of Hong Kong’s carbon emissions."
Andrew Lau, Director, ESG Advisory Asia at Colliers
“Though only one aspect of the whole idea, the environment is particularly relevant to real estate,” said Andrew Lau, Director, ESG Advisory Asia at Colliers. Buildings account for 90% of electricity used in Hong Kong, generating over 60% of Hong Kong’s carbon emissions, so it’s not surprising it’s getting the most attention.
The Hong Kong Government’s Climate Action Plan 2050, which it unveiled in October 2021, will play a crucial role in how the city’s real estate industry adheres to this aspect of ESG principles. Energy saving and green buildings form one of the four decarbonisation strategies in the plan. This involves reducing the overall electricity consumption of buildings through promoting green buildings, improving buildings' energy efficiency, and promoting a low-carbon lifestyle.
The plan ties in neatly with the city’s drive to be a hub for ESG investment from Asia and the rest of the world. The government has sought to involve asset owners, asset managers and product owners, investee companies, financial regulators, academia, civil society and other stakeholders in the initiative. The creation of the Green and Sustainable Finance Cross-Agency Steering Group, led by the Hong Kong Monetary Authority (HKMA) and the Securities and Futures Commission (SFC), in May 2020, and consisting of other financial regulators and policy-making government bureau is an example of the work that is going on.
The Steering Group’s goals are to co-ordinate the management of climate and environmental risks to the financial sector, accelerate the growth of green and sustainable finance in Hong Kong and support the Government’s climate strategies through policy and regulatory development, enhancement of technical knowledge and expertise of green and sustainable finance issues in Hong Kong and examining where Hong Kong can take a lead regionally and globally in green and sustainable finance issues.
"Establishing Hong Kong as an ESG investment hub for all sectors, including real estate, means using Hong Kong’s capabilities as an international financial centre."
Hannah Jeong, Head of Valuation & Advisory Services, Colliers
“Establishing Hong Kong as an ESG investment hub for all sectors, including real estate, means using Hong Kong’s capabilities as an international financial centre in capital markets, risk management and professional services to help asset owners and asset managers develop and execute their ESG strategies,” said Hannah Jeong, Head of Valuation & Advisory Services, Colliers.
It is a commitment to ESG principles on the part of Hong Kong that any multinational company that chooses Hong Kong as its Asian base will feel immediately.
Once investment for a real estate project has been secured, the reports and ratings compiled by commercial and non-profit organisations help investors and other stakeholders assess a transaction or company’s ESG principles and the legal, regulatory or reputational risk involved in doing business with it.
“What this intense interest in ESG, and the development of ways to measure it, shows is that it is no longer possible, if it ever was, to package a green label on a piece of real estate and expect the market, regulators and the public to take it at face value,” added Andrew.
The robust planning needed to adhere to ESG principles in the real estate sector can cover strategy formulation, target settings, ESG scoring and energy management, carbon reduction certification, renewable energy advisory, and lifecycle asset management.
“The typical first step is a Net-Zero gap analysis which maps out a client’s properties current situation and future targets, before we can come up with a strategy for getting to Net-Zero” said Andrew, who has more than 18 years’ experience in energy & sustainability, building technology and facilities management. “The goals for property owners of this sort of planning are lower operating costs, an increase in rental income, an extension to the lifecycle of buildings and to minimise ESG-related business risks.”
Boosting asset values
Assessing for ESG risk introduces more complexity to an investment decision and maintaining a building’s sustainability credentials throughout its life invariably means more expense. However, an increasing amount of evidence shows that this does not have to come at the expense of profit. Research has put the so-called green premium at between 5% and 30%. A study by the University of Hong Kong in 2017 suggested this could be 6% to 8% for green building projects in the city.
Building more sustainably, for example, by using new eco-friendly materials or smart heating or ventilation technology, can not only help the environment but also boost return on investment. McKinsey research has found that cost reductions through lower energy consumption and reduced water intake is one of five ways in which “a strong ESG proposition links to value creation. The others are through top line growth, regulatory and legal interventions, productivity uplift and investment and asset optimization,” explained Hannah, who quickly added "Some businesses can see an immediate return from investing in robust ESG principles through increased cashflow.”
Hong Kong is quickly establishing itself as an ESG investment hub. Investors can commit themselves to the city’s real estate market with the confidence that they are adhering to ESG principles, and the sustainable growth of their business can yield real financial returns.
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