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ESG stands for environmental, social, and governance. It is a set of criteria for evaluating stocks used by investors who want to keep their portfolios as socially responsible as possible. The idea is that not only can you achieve strong investment returns, but you can also find sustainable investment opportunities that are beneficial to employees and society as a whole.
You can read an excellent and thorough discussion on ESG investing concepts by The Motley Fool, but here's a general overview:
Environmental criteria include an investment's policies when it comes to things like:
- Climate change.
- Carbon footprint.
- Water conservation.
- Renewable energy usage.
- The safe disposal of waste.
For example, ESG stock investors might want to see companies that get 100% of their energy from renewable sources.
The social aspect of ESG investing has to do with human issues, such as company culture. A few criteria for socially conscious companies include:
- Treating their employees well.
- Paying reasonable wages to all employees.
- Offering great benefits.
- Encouraging personal development.
- Ethically sourcing their materials.
ESG investors want to know that management cares about all stakeholders, not just themselves. For example, an ESG investor might want to know that the majority of management compensation is incentive-based in ways that drive shareholder returns. Diversity of the board is also a common ESG criteria that falls into the governance category.
To be clear, ESG criteria all by themselves don't help you determine if an investment is financially sound. They should be used to find socially responsible investment opportunities, but it's still important to use traditional methods of evaluating each investment to determine whether it's a good opportunity.
How does ESG fit into real estate investing?
As mentioned, environmental, social, and governance factors are the main criteria used when evaluating whether an investment is socially responsible or ethical. And while ESG investing is most commonly used by stock investors, it certainly can be applied to real estate investing as well.
Obviously, not all of the possible ESG criteria apply to every type of real estate investment. For example, if you're simply buying a single-family rental property, there aren't really any governance concerns to take into account. However, here are just a few of the possible ways to make sure different types of real estate investments are ESG-friendly.
Since most real estate investment trusts, or REITs, trade just like stocks, the criteria for ESG investing are quite similar to those used by stock investors. Just to name a couple of examples, a company like Hannon Armstrong Sustainable Infrastructure Capital (NYSE: HASI) that invests in renewable energy infrastructure could be a good place to look. Or, ESG investors might want to look at a company like data center REIT Equinix (NASDAQ: EQIX), which has committed to achieving 100% renewable energy usage as soon as possible.
Real estate investment through crowdfunding can be a great way to boost your investment returns, but it's also somewhat tougher to evaluate these deals from an ESG perspective. Some questions might be answered in a deal's offering documents, but you may need to ask some questions on your own.
For example, if the deal involves a construction project, you might ask:
- How will materials be sourced, and how will waste products be disposed of?
- Will the property derive its energy from renewable sources?
- Is the majority of the deal sponsor's compensation aligned with the interests of investors?
When investing in real estate, you certainly have quite a bit of control over the ESG-focused nature of your properties. For example, you could choose to swap out old, inefficient water heaters for modern tankless systems or hire a lawn maintenance company that only uses environmentally friendly chemicals.
The Millionacres bottom line
The trend toward ESG investing certainly translates to the world of real estate. By focusing on environmentally friendly, socially conscious, and responsibly managed real estate investments, you can not only set yourself up for excellent returns but for decades of sustainability as well.
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