Introduction:

Not too long-ago real estate embodied the epitome of capitalism, with the sector being predominantly dominated by one gender, men. Today real estate is being globally reshaped and rethought through applying of ESG (Environmental, Social, and Governance) standards. Who is leading this trend? Women.

ESG or ‘responsible investing’ was previously considered a marginal or “finance backwater” position across all sectors, real estate not exempt.[1] With time this has had a conversely positive impact on female leadership in venture capital, hedge funds and real estate - the previously ‘unfashionable’ ESG tasks and jobs which were handed off primarily to female employees have now created indispensable leading experts in the field, of whom the vast majority are women. The HFObserver recently published a report on employment in alternative asset management industries which stated that 49.6% of ESG hires in 2020 and 2021 were women, we expect to see this figure continue to grow.
 
Environmental:

When one thinks of sustainability and ESG metrics of real estate, they commonly centre their perception exclusively on the “E” part of ESG, i.e., greener buildings and greener infrastructure. Real estate is one of the largest consumers of energy (40% of all global carbon emissions emanate from real estate)[2], hence the immediate need for; more sustainable, durable buildings constructed with eco-friendly and/or recyclable materials. Furthermore, implementing smart-tech systems for heating and ventilation must become standard practice, not only will this reduce carbon emissions on the operational side but also on the construction side – electrification is the way to achieve net zero commitments within real estate..[3]

In addition, the intensity and frequency of severe weather-related events in recent years as a result of global warming has forced many real estate developers to assess “property vulnerability and resilience” as part of their practice – another necessary step towards sustainable real estate.[4] Sustainable real estate helps the local environments, as well as the planet and, as all responsible investors are aware, climate change is not simply an investment ‘trend’, it must be accounted for actively. Building quickly and cheaply may have been attractive in the past, but this is not so since 1990’s founding of BREEAM - the environmental damages of building cheaply grossly outweigh the short-term profits. The appetite for ESG in real estate derives primarily from this, it closes a gap in the market where real estate assets are able to have longer-term value attributed to them, creating medium/long term profits which are in keeping with the lower-risk volatility of the asset. More generally, ESG managed assets have seen an enormous increase in value, from $13 trillion in 2012 to $30 trillion in 2021 (Global Sustainable Investment Alliance data).[5]
It is often more practical and easier to build new real estate, especially in developing countries where land is more readily available and developers are greeted with lower labour costs, however, it is important for real estate investors to also look at making existing assets more sustainable, those which were built quickly, to a subpar standard and inefficiently. To place this into perspective; existing buildings (non-green developments) currently account for 36% of EU’s carbon emissions. Statistics are worrying, to state the obvious.[6] With rapid migration to urban areas, cities which have already exhausted their land face a huge challenge - a rising demand for housing and a mismatching low supply of it. Oftentimes to re-build bigger and better means to destroy first, therefore displacing families, communities, and jobs as part of the process. This is where the S and G of ESG come into play. Real estate does have a significant social impact, both positive and negative. ‘Good’ social impact is achieved by projects which rehabilitate public spaces as well as existing real estate, build both affordable and social housing, and actively invest in improving local infrastructure. Negative social impact, on the other hand, is created effortlessly – by not caring. In recent years real estate developers with little to no ESG considerations have started to experience strong opposition by local communities, leading to higher costs whether due to delayed execution times, government petitions, protests, or inevitable modifications of the initial project. Thus, we can certainly see how ignorance of ESG principals in real estate will have and already has an adverse effect.
The Social and Governance parts of sustainable real estate investment are now becoming highlighted as equally important to Environmental factors, with developed countries’ governments and developers setting an example with increased regulation and firm ESG goals – 2020 GRESB assessment, BREEAM, the INREV agreement, the 2030 and 2050 SDGs; of which points number 10 and 11 outline goals to "build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation" and to "make cities and human settlements inclusive, safe, resilient and sustainable".[7] With emerging markets, including Latin America, accounting for 52% of all current construction activity we can see that ESG regulation is a necessity needing to be made sooner rather than later.[8] Governments as well as investors themselves need to set clear E, S, and G standards for both private and public developers so that future developments benefit their shareholders, stakeholders and the environment coherently, rather than “focusing on environmental aspects at the expense of social factors,” which is currently the underlying trend of “sustainability certifications.”[9] ESG real estate regulation in Latin America, for instance, remains convoluted and outdated with long procedural waiting times, bureaucracy, and little room to go above and beyond the existing boundaries, in essence; halting sustainability innovation in its real estate sector.

We can, however, see that Latin America is recently gaining traction in funding for sustainable real estate with IDB Invest pledging to invest $10 million in Paladin Realty Latin America VI (Zero Carbon Affordable Housing) Fund LP, which is the first zero carbon affordable housing fund in the region.[10] IDB Invest’s support will include resources mobilized from the Clean Technology Fund (CTF) in order to create increasing portfolio sustainability. This deal is aimed at increasing the availability of capital for the development of real estate by mid-sized developers and targeted to households of Mexico, Colombia, Brazil, and Peru with a highlighted focus on affordable housing.[11] Deals like this are not, truthfully, a new wave of investment in Latin America, what they are, nonetheless, is a clear reiteration of Latin American ability to adapt to new trends, new ideas, curiosity, and resilience. Fintech, Edtech and Ecommerce have all been hugely successful sectors in Latin America, even throughout the pandemic, and now it is rightly time for LatAm real estate to shine. It is also important to note here that real estate ESG investment in Latin America is not yet a gender equal field, in comparison with Western economies and while the sector still remains quite male-dominated, it is safe to assume it will not remain this way for long.
 
Social:

COVID-19 brought on a fundamental change to the approach of real estate considerations of social impact in investments, whether on an individual level or on the level of entire strategies.[12] One of the obvious areas of demand shift due to and post pandemic regulations from all tenants, both commercial and private, is space – the one thing residents have been willing to forego in the past to cost cut. Overall, buildings’ health and safety has been elevated amongst tenants’ core expectations like never before, likewise with the standard of provision of buildings’ management services such as cleaning, porters, security, and outdoor access.[13] Moreover, companies now have the added responsibility of ensuring the human rights of the workers who provide these services is fairly compensated and accounts for risks which were not present in pre-pandemic times.

The Building Owners and Managers Association (BOMA) outlined key principles in light of the pandemic, one of which was “efforts to limit financial impacts should not be made at the expense of workers’ rights and welfare.” We can see that post-pandemic (some) real estate developers have continued to adhere to this, while the larger majority not so much. Enormous projects like the Qatar FIFA World Cup not only cost immigrant workers certain rights, such as leaving the country without permission from their employer,[14] but also their lives, with an estimated 6,500 deaths occurring directly and indirectly as a result of the extensive building project.[15] Unfortunately the social element of real estate is often seen as an impact on immediate local community and jobs, not accounting for the immigrant workers and their welfare.

This is a disheartening trend seen often in developing countries, due to lower migration regulation and easier visa processes. It is common for developers to hire immigrant workers to complete real estate projects, after all, the developer receives the same quality labour but at a much lower cost. Why? Because in most countries the official minimum wage is only applicable to those who are officially residents or citizens of said country, so the wage of an immigrant worker as well as their working hours per day are not government regulated and can be decided quite freely by the employing company. This type of attitude to foreign labour is a large humanitarian crisis, with workers being treated as disposable and often being simply ‘let go’ after a project is complete, with no future employment promise or opportunity to access a career ladder. It is systematic labour exploitation, and although it is for the most part legal, it is an abuse on human rights. The displaced immigrant labour is not guaranteed a severance package, nor free healthcare, nor any other social benefits usually given by companies post termination of contract. As such, company standards need to change, and they need to change urgently using ESG principles. Labour rights need to be protected not just by workers’ unions but also by companies and governments.

On the topic of change, while COVID-19 may be arguably coming to an end, the change in demand of (and for) real estate is here to stay. Working from home has been a blessing in disguise for many people and the appetite for in-person office jobs has fallen drastically. As such, developers now face a challenge to not only provide adequately spacious office spaces but also create an atmosphere which workers will choose over their private residence - a difficult task but nonetheless a great social investment for the mental and physical wellbeing of those working office-based jobs. Real estate investors and developers “now have an increasing responsibility to assess their corporate social responsibility initiatives”;[16] in short, diversity. Diversity of buyers and tenants has often been hierarchical, whether by social class, profession, race, gender, or age. The influx of urban migration is rapidly changing this demographic system and developers need to accept this change quickly. Investors now need to account for the needs of all rather than a certain socio-economic group, and meanwhile demand is higher than ever, the expectations and requirements are too. Tenants now seek to rent high-performing spaces from socially responsible companies – a real estate developer may not care about ESG, but their customers most certainly do. [17]
Social equity and inclusion throughout the business and governing board is also a vital practice, one which developing countries’ businesses at present lack. Attracting and retaining employees is a key ESG code of conduct, social impact is not only external, it is internal too. Three simple words make for an infinitely positive work environment – code of conduct. An effective, inclusive code of conduct which sets necessary boundaries for practices and awareness is key and, best of all, it costs nothing. The pandemic has also shown that ‘firing and rehiring’ is not effective, which has been a true eye-opener for many business models including real estate. Cutting costs through cutting labour is quick and easy, but inefficient. Increasing productivity of labour is vital (for any business model) and if workers are sure of their job security and enjoy their work environment it is achieved in almost all cases. Although not directly correlated, this tangible feeling of ‘safety’ is also transferable to tenants, not in the sense of avoiding physical danger per se, but rather that one will not made to move out and find alternative accommodation whether due to rent hikes, bad maintenance, difficult landlords or otherwise. Sustainable buildings bode for sustainable tenants, and therefore sustainable financial returns medium and long term.
 
Governance:
 
Without a shadow of a doubt governments have a big role in dictating the future of both ESG and real estate. Private investment and company policies are, at the moment, fore-fronting real estate ESG in developing markets, and they are yet to be given the green light on many initiatives. This is where legislation changes are essential and ultimately can either harm or promote innovation. Deregulation will do more harm than good, with greedy developers likely hearing “the sky is the limit” and taking this phrase without a pinch of salt, building bigger but not better. Over-regulation, on the other hand, will see many great potential ESG real estate investments chokeholded, due to uncertainty and lack of forward-thinking. The essence of government regulation is functionality, laws need to work in favour of positive outcomes and prevent negative ones. The EU and Canada, for example, have implemented laws as well as guidelines in line with ESG such as national strategies with clear energy saving targets, “coordinated awareness raising initiatives, skills programmes that train the construction workforce to deliver high quality retrofit, financial mechanisms such as green mortgages and loans,”[18] in addition to sizable grants for R&D.
Social issues such as workers’ and tenants’ rights, as mentioned above, can be resolved with the help of the government and the addition of laws tackling these issues is yet to happen in many countries. The gender pay-gap, for example, remains (although much more prominent in developing countries) and even though many women are often more qualified than men for a particular role they still make 60 cents to the dollar the man makes. The density of women in high-paying positions is a serious reflection of this inequality, with the promotions to top-end positions often being given to the less qualified man, for reasons of a woman’s supposed predilection to have children and therefore pause or end her career at some later stage. Such beliefs or assumptions are outdated, as women in ESG have been proving for decades, and governments need to take action to reduce this workplace inequality. For instance, single women are 5% more likely to own a home than a single man in the same age range (25-50), how come the female gender is still seen as less capable, as less likely to be a good investor?[19] The answer is incomplete data which prolongs the acceptance and justification of inequality.
Governance within companies is often difficult for this particular reason – a lack of or a difficulty collecting data. Data is needed to create sustainable ESG plans, furthermore, to execute those plans effectively. Data, as mundane as it may sound, is “in high demand because it enables companies to understand where change or innovation is needed.”[20] Company management needs to use tools and databases to document, follow and assess its ESG progress. We have recently seen a new technological wave – “proptech”, where data is streamlined in auditing and reporting for real estate.[21] Governance practices aid the collection of data, meanwhile accurate, digestible data aids sustainable governance practices, it is a beneficial, cyclical process, sans which real estate and other capital investments simply crumble in the long-term.
Moreover, in order to sustain investors’ confidence, it is now required of companies to have near full disclosure and transparency, for instance; “executive compensation, board members’ qualification and board appraisal, investor’s relations and corporate rating.”[22] While Unites States and United Kingdom have previously been leaders of such governance procedure, developing countries are starting to go above and beyond the current standards, although slowly. Real estate companies, especially when it comes to property valuation and executive compensation, have often sought outside counsel for advice on handling the discourse between investors and management. This approach, however, is inefficient and any problems incurred are not solvable on a surface level – the change needs to occur across the whole mechanism -  “the relationships between [a] company’s management, owners, creditors, employees, suppliers, clients, and other stakeholders,” have to be formed and maintained on the basis of transparency and accountability. Positively cooperative behaviour from all parties “reduces abuse of power and allows for greater collective freedom of thinking and action,” thus encouraging daring, disruptive, riskier innovation to be deployed.[23]
Asymmetric information alongside segmented control and ownership proves to incur four main plights: a) lack of provision of effort due to subpar management decision-making, b) failure to exploit long-term opportunities through managerial “short-terminism” for profit or exit c) excessive diversification, investment into many small low-risk projects which is unsustainable due to lack centrality of goals d) continuing from (c) unforeseen overinvestment into low risk projects often resulting negative economic returns due to withholding of “free cash flow from shareholders” by management.[24]

What to expect of the future:
 
Construction and real estate have long been “a man’s world, from blue-collar trades such as masonry and carpentry to the executive suites of developers and builders,” only now is the sector warming up to accepting how indispensable female experts are. [25] Investors, owners, and operators can leverage technology and material ESG criteria to drive actionable change. From carbon reduction, operational efficiency to human rights and broader regional regulation opportunities abound to improve existing  practices across the world and namely developing regions, like Latin America. 
Francesca Whalen, Managing Partner of Integra Groupe inputs the following: “To give readers an idea of the enormous sustainable real estate investment opportunity in Latin America we can look to what is happening and has happened in Europe. Given Europe’s decarbonization goal and that most buildings are not energy-efficient, the European Commission is convinced it is necessary to double renovation rates in the next ten years to provide for higher energy and resource efficiency. By 2030, 35 million buildings should be renovated, which would also create 160,000 additional green jobs.[26] This will require billions in necessary public and private investments. As stipulated throughout this article, renovation is costly, however necessary.” This is nonetheless a clear example that implementing ESG from the get-go of real estate projects should be done as an innate practice.
 
Eduardo Atehortua, Head of LATAM (ex-Brazil) of Principles for Responsible Investment (PRI) highlights: “Real estate investors have a long history of responsible investment largely due to the relative homogeneity of the underlying assets – buildings. The long-term nature of most real estate investing has also increased the focus on ESG factors. Longer investment horizons may result in a greater risk (or opportunity) that financially material ESG factors will arise.” As regulation catches-up in Latin America we anticipate a myriad of attractive opportunities to improve available inventories that will generate strong risk-adjusted returns in the region. On a concluding note, we expect to see a reflection of the gender diversity we see within the European real estate sector becoming reality in LATAM.