What is the Significance of ESG in Real Estate?

Environmental, Social, and Governance (ESG) considerations increasingly underpin business strategies and are transforming real estate and the built environment globally. This article explores the significance of ESG, examining current practices and how it impacts Viet Nam’s real estate markets. Understanding the benefits, challenges, and future trends associated will help businesses remain competitive and strive for a more sustainable future.

Understanding ESG in Real Estate

ESG factors encompass Environmental (E), Social (S), and Governance (G) aspects. In real estate, ESG represents a commitment to sustainable and responsible practices throughout the property lifecycle.

“E” focuses on a company’s environmental impact and sustainability practices, and in real estate, this often refers to how a property impacts the environment. This is increasingly measured and minimised through the incorporation of energy-efficient features, sustainable construction practices, and green certifications.

"S" examines social responsibility, including human rights and community relations. In the built environment, this could consider aspects like community engagement, occupant well-being, diversity, and inclusion.

"G" evaluates corporate governance, assessing leadership, transparency, and ethical decision-making.

Read more about ESG at Savills.

ESG in Regional Commercial Real Estate

Although Asia is a slower starter in the energy transition, interest in ESG issues among Asian investors and corporates has surged, and Asian markets have seen the emergence of sustainable buildings and ESG practices. In Asia Pacific, Australia, Hong Kong, Japan, New Zealand, and Singapore are the frontrunners in sustainability, meanwhile, markets such as China and Viet Nam are progressing rapidly. According to Asia Pacific ESG Spotlight May 2022, the Hong Kong Government was aiming to reduce commercial building electricity consumption by 30% to 40% from 2015 levels by 2050. Between 2016 and 2020, 77% of all new buildings in urban areas in China obtained green certifications, and the country aims to raise this to 100% by 2025.

Beyond rising public concern and government regulations, there exist financial reasons for investors to enhance the sustainability credentials of their portfolios, including risk management, transparency, cost-effectiveness, and increased revenues. In 2022, Urban Land Institute (ULI) and PwC published Emerging Trends in Real Estate Asia Pacific; a survey in the report highlighted that 37% of the respondents saw ESG factors as a mandatory consideration in real estate investment decisions, a notable increase from the 22% recorded two years earlier.

According to Asia Pacific ESG Spotlight December 2023, Singapore leads the sustainable transformation in the region; by December 2023, 98% of the city’s Grade A office stock was green certified. In terms of volume, Bangalore, Shanghai, and Tokyo are the top three markets with approximately 9 million m2 of green stock.

In Viet Nam, 28% of Grade A stock in Ho Chi Minh City had green certifications, and according to Savills Market Report Q3/2023, 80% of Grade A and B office stock by 2026 will hold green certifications. In Ha Noi, 20% of Grade A stock had green certifications by December 2023. Developments including 27-29 Ly Thai To, Grand Terra and Tien Bo Plaza are expected to deliver 68,400 m2 of green office space.

Often, projects with green certificates are newer and better designed and could be seen as charging a ‘green premium‘. However, as green buildings are also often some of the newest on the market, it remains unclear whether the observed premiums derive from their environmentally sustainable attributes or simply result from their novelty. Green premiums are also reinforced by growing tenant demand for net-zero office spaces while 'brown' assets are being left stranded.

Across the Asia Pacific, Seoul and Bangkok have the highest rental premium for green offices, standing at approximately 19%, followed by Singapore with 18% by Q4/2023. In Viet Nam, certified buildings in Ho Chi Minh City and Ha Noi have a premium of as much as 8%

Read more in Savills Asia Pacific ESG Spotlight.

ESG in Viet Nam’s Commercial Real Estate

The ESG Readiness in Vietnam report by PwC in 2022 reflects a rising trend of embracing ESG among Vietnamese companies. Approximately 80% of the surveyed businesses committed to or plan to commit to ESG within the next two to four years. FDI companies demonstrated a clear dedication to ESG, with 57% explicitly stating their commitment. Notably, 40% of private and family-owned enterprises already established ESG commitments, showcasing responsibility among the next generation of Vietnamese businesses. As stated in Viet Nam ESG Spotlight Q2/2023, there are currently 20 office buildings that have Leadership in Energy and Environmental Design (LEED) or Green Mark certification in Viet Nam.

Benefits of ESG Adoption in Real Estate

As the property market continues to prioritise sustainability strategies, businesses must integrate ESG into their operations to remain competitive, otherwise, they risk obsolescence.

Implementing energy-efficient technologies and sustainable practices can lead to significant operational cost savings over the long term. From reduced utility bills to lower maintenance costs, ESG initiatives contribute to the overall financial performance of real estate assets.

Landlords embracing ESG standards signal their commitment to sustainable practices, making their properties more attractive to tenants with stringent ESG commitments. Moreover, non-compliance with ESG standards may render properties undesirable for businesses with their own environmental and social responsibilities.

ESG adoption presents a unique opportunity for landlords to strengthen relationships with tenants and the wider community. Companies are increasingly prioritising sustainability in their corporate social responsibility initiatives, and tenants are more likely to lease spaces that align with their values and foster stronger relationships between landlords and tenants.

As APAC, and the rest of the world, march toward 2030 as a net zero target, decarbonisation has become a critical part of the process, and roadmaps must now include adjusted long-term sustainability CAPEX in existing maintenance plans. Additionally, portfolios must be assessed on an asset-to-asset basis to identify the most cost-effective options for certification. Decarbonisation plans and pathways are most effective when carried out in conjunction and collaboration with tenants and occupiers. Sam Crispin, Regional Head of Sustainability and ESG at Savills APAC, added “Getting to grips with sustainable innovation seen through the lens of embedding energy performance upgrades into maintenance planning resulting in operational efficiency. This not only helps future proof the asset but may also result in green premiums with the resulting impact on valuations. Taking this to the next level includes a new approach to tenant engagement. The environmental and business cases are compelling and interlinked.”

Conclusion

The adoption of ESG in property in Viet Nam is not merely a trend but a strategic imperative for building a sustainable future. For a comprehensive overview of ESG in Viet Nam and its impact on real estate, download Viet Nam ESG Spotlight Q2/2023.