Environmental Sustainability in Real Estate
Traditional violin bow materials aren’t environmentally friendly. Bowmakers traditionally made bow sticks from Pernambuco, which is the perfect density needed for the bow to balance correctly. Also known as brazilwood, Pernambuco is the heartwood of the Paubrasilia echinata. Found on the South American coast, it was first discovered by Portuguese explorers in the 16th century.
Although brazilwood has been used for bows, it was originally particularly prized in Europe for its reddish color and use as a dye. Although the wood is technically renewable, it was overharvested, and the plant now is considered an endangered flora.
Pernambuco isn’t the only endangered item traditionally used on bows. Ivory, from endangered elephant tusks, was used for the tips and, sometimes, the frogs of bows. The small piece of leather on the bow stick where the violinist places their thumb was monitor lizard skin. The lizards were overhunted and are listed on the endangered species list.
Also, the slide plate and dot on the side of the bow were traditionally made from mother of pearl, the iridescent lining of seashells. Mother of pearl often came from abalone, which also is on the endangered species list.
Bowmakers have adapted to make bowmaking more sustainable. The industry now uses materials other than Pernambuco, such as carbon fiber, for bow sticks. Bowmakers dedicated to sustainability started the International Pernambuco Conservation Initiative to plant new Paubrasilia echinata trees. Modern tips are usually made from metal or plastic. Leather is used for the bow grip, and slide plates now are made from sustainable materials.
Interest in sustainability isn’t limited to bowmaking. Other industries and consumers, as well as the Securities and Exchange Commission and other agencies, are focusing on industries’ ESG, environmental, social, and governance impact. This article discusses ESG, focusing on “E” or environmental impact initiatives applicable to the real estate industry.
What is ESG?
ESG requires a holistic evaluation of the business to determine how it serves its stakeholders inside and outside of the company and the environment where it has influence. The relative focus on environment, social, and governance will vary by company.
Focus on environmental should include the company’s use of natural resources, conservation efforts, and recycling and sustainability. Companies also may evaluate their carbon footprint and energy use. If the business involves the use of chemicals, the company might determine if there is a more environmentally friendly option.
Not only is it important that companies use their resources to make the world a better place, but ESG also is good business. For example, conserving energy, using renewable energy, and recycling can reduce costs and help the environment. Job hunters, consumers, and investors value ESG and may bypass a company that doesn’t.
Conservation efforts aren't just good for the environment. They also can lead to significant cost savings, for instance, in energy and water costs. Creating an ESG program also might enable real estate investors to take advantage of government tax incentives for energy efficiency and green buildings.
The SEC’s Position on ESG
Many real estate investments are sold through real estate funds, limited partnerships, or REIT structures, which usually are subject to securities regulation. While most real estate funds aren’t subject to mandatory ESG disclosure, the SEC has taken an interest in this area.
For instance, in 2022, the SEC proposed rulemaking that would have required ESG-focused funds to make additional disclosures in offering documents and annual reporting. The purpose of this proposal was to “provide investors clear and comparable information about how a fund considers ESG factors.”
The proposed rule would apply not only to funds sold as ESG-Focused or as seeking a particular ESG impact but also to funds that "integrate ESG factors alongside non-ESG factors in investment decisions." Most ESG-Focused funds also would have to disclose information about greenhouse gas (GHG) emissions.
Further, the SEC now has a Climate and ESG Task Force charged with pursuing enforcement actions against issuers whose ESG disclosures contain misstatements or material omissions that violate securities laws. This task force intends to use sophisticated data analysis to assess information from documents filed with the SEC.
In November 2022, the SEC charged Goldman Sachs Asset Management, L.P., a registered investment advisor, with failing to have ESG policies and procedures and, where such procedures existed, failing to follow them. Goldman Sachs settled the matter by paying a $4 million penalty.
The Goldman Sachs charge didn’t allege securities fraud. However, making misrepresentations in a securities offering document about ESG, such as stating an issuer has ESG policies and procedures when it does not, could give rise to a securities fraud claim. Therefore, all issuers, including real estate funds and limited partnerships, should ensure that their ESG disclosures are accurate and that there are processes to ensure staff follows through with the ESG plan.
Environmental Initiatives for Real Estate Investments
Real estate investment environmental initiatives will vary by asset class, geographic targets, building age, and construction type. An ESG plan should include written policies and procedures for every stage in the life cycle, from acquisition through disposition. And there should be regular evaluations to ensure the policies and procedures are implemented.
Owner environmental initiatives for investment real estate might include:
Investment criteria that include green construction requirements
Creating pro formas that include funds to improve the property’s environmental impact through water conservation showers and toilets, energy-efficient LED lighting and motion-triggered light switches, and high-efficiency HVAC
Selecting property managers dedicated to ESG
Including clauses in tenant leases that prohibit activities that aren’t environmentally friendly. That might include air quality initiatives that prohibit smoking and propane heaters in the building to require that green cleaning supplies be used in commercial buildings.
Reducing or eliminating risk from potentially hazardous building materials such as lead-based paint and asbestos.
Fostering green areas by planting trees and plants
Adding community gardens to multifamily properties
Properly maintaining water elements, such as streams and retention ponds, to foster biodiversity
Recycle, reduce, reuse programs designed to minimize waste both by property management and tenants. This might include events where tenants can dispose of old computer equipment for recycling, a tenant listserv, or "swap meet" events where tenants can sell or give away unwanted items for reuse by others who need them.
Air quality initiatives through enhanced filtration systems that help prevent virus transmission
Energy audits and improvements, such as caulking, additional insulation, and installation of energy-efficient doors and windows
Installing window treatments that enhance energy efficiency or allow natural daylight to light rooms during the day. Office buildings might consider automatic shades that open and close to maximize indoor light and energy efficiency
Adding solar panels
Adding bike or scooter sharing and parking
Requiring cleaning contractors to use “green” products
Monitoring and Revising the Plan
The bowmaking industry has paid attention to the environmental impact of its art. As a result, new bows often include many sustainable, non-endangered materials. Property owners, likewise, should continuously evaluate the effectiveness of their environmental initiatives and make changes as necessary to increase impact.
Finally, environmental initiatives and an ESG policy must evolve and adapt to the times. For instance, an air quality initiative in 2019 likely would have been concerned with fumes from smoking and environmental toxins. Because of the COVID-19 pandemic, people now are concerned about disease prevention and preventing virus transmission. By 2025, there could be new and different environmental concerns. Therefore, the most effective ESG strategies will be proactive and anticipate changing concerns.
© 2023 by Elizabeth A. Whitman
Any references to clients and their legal situations have been modified to protect client confidentiality
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