Tracking ESG’s path in Philippine real estate

Real estate is said to contribute roughly around 40% of the world’s greenhouse gas emissions. These come from not just construction but also the entire lifecycle of an asset, including a building’s energy use, operations, and repurposing. As the real estate sector becomes more cautious of its environmental and social impact, investors and developers have begun to come up with ways to contribute to the ESG (environment, social, governance) initiative.

There are clear benefits of doing so. First, the major occupiers are now demanding for it. For instance, over 70% of Fortune 500 companies have commitments to net zero emissions. In fact, one important trend coming gradually into the Philippines is green leasing where landlords commit to help the occupier achieve sustainability objectives.

Already seen in developed markets such as Australia, the UK, and the U.S., the Philippines is likely to witness more of this trend locally over the next few years.

A second benefit is premium. In Metro Manila, green buildings continued to be more resilient in their occupancy level than non-green buildings in 2022. In fact, LEED-certified office buildings registered an 11% average vacancy and an PhP 1,090 average asking monthly rent versus 24% vacancy and PhP942/sqm in non-LEED buildings. From a landlords’ perspective, commitment can mean commercial opportunities.

Yet the industry faces a number of issues vis-à-vis the path towards sustainability, as revealed during an ESG roundtable Santos Knight Frank hosted in Manila on January 5. One is demolishing and redevelopment. The UK and European markets have been striving to achieve net zero in construction and operation, but the carbon emissions from demolishing and redeveloping old properties have been brought in the spotlight. An estimate in the UK puts CO2 emissions in a building’s demolition and re-building at around 40,000 tons – equivalent to the carbon footprint of a traveler flying between Manila and London every day for 34 years.

Instead of demolishing older buildings, a “repositioning strategy” could be implemented to achieve compliance, relevance, and appeal to the occupier market. This would be a good option for owners of properties who have challenges in redevelopment. (The National Cultural Heritage Act of 2009 requires approval from cultural and heritage institutions for demolishing buildings of at least 50 years old.)

Another issue is measurement. The lack of a standardized way of actually measuring an asset’s ESG contribution has been attributed to cultural considerations, uncertain financial implications, and insufficient established laws. ESG criteria should be well-established and integrated into the entire lifecycle of commercial real estate assets.

It is difficult to manage what one cannot measure. As an industry, it is even more difficult to see where the sector is in the path towards sustainability without a common language to speak. In order to balance social and commercial interests, the real estate industry may need to focus on establishing a well-defined benchmark in managing assets in consideration to their ESG impact.

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