Environmental, social and governance laws are rules that encourage sustainable practices. These laws have gained attention as companies face increasing pressure to take measures to comply with them and some institutions fight back against them.
While ESG laws are not new, they are currently receiving more attention in commercial real estate.
Environmental regulations
ESG laws include rules about the environment. These regulations focus on factors such as reducing pollution, saving natural resources and using eco-friendly practices. In commercial real estate, owners and developers can comply by using energy-efficient systems and reducing waste.
Social responsibility
ESG laws also emphasize social responsibility, making companies consider how their actions affect society. For example, new regulations to protect tenants from COVID-19 affected commercial real estate owners in 2020. Owners had to take measures to improve air quality and sanitation, which cost them money.
Governance standards
Governance is another component of ESG initiatives, but is generally not codified into laws or regulations. One way commercial real estate investors demonstrate they are promoting ESG initiatives is by obtaining certifications for their buildings. A common certification is Leadership in Energy and Environmental Design. Investors can pursue the following categories of LEED certifications:
- Building design and construction
- Interior design and construction
- Building operations and maintenance
- Neighborhood development
Building Research Establishment Environmental Assessment Methodology is another certification that indicates a building is eco-friendly.
Backlash against ESG laws in Texas
In 2023, Texas passed a law prohibiting insurance companies from using ESG standards when assessing rates. Other state laws restrict state investments in companies that use ESG standards to avoid doing business with the fossil fuel industry. While these laws protect some companies, critics have pointed out their long-term costs to taxpayers.
Some real estate investors do not like the added hassle of having to follow ESG laws or of voluntary compliance with industry initiatives. However, doing so can improve their companies’ reputations. Compliance can also avoid legal problems and fines in situations where compliance is mandatory.