How do we value our properties? Professional real estate valuers have traditionally been taught to rely on financial ratios such as profitability and capital budgeting to determine the value of a property. However, is it enough for today’s investment world? The rise of ESG standards , and public awareness of sustainability suggest that a new approach is needed. Environmental, social and governance (ESG) issues have significantly affected real estate valuation in recent years, influencing how people recognise the value of an asset. The concept has gained maturity in developed markets like the US and EU. Hong Kong, despite a late start, is catching up quickly. The stock exchange operator introduced ESG reporting policies in 2020 and more companies have committed to sustainability in their corporate mandates. In fact, according to a CBRE survey, practically half of the respondents have taken steps to include ESG criteria in their investment strategy in 2021 , up from 40 per cent in 2020. Hong Kong is making great efforts to transform itself into one of Asia’s major ESG investment hubs, from developing regulations and policies to green financing and project management. These initiatives underline the importance of understanding how ESG can help secure value for investments in the long run. Be eco-friendly, we learn from schools and public awareness campaigns. Yet the reality is that real estate contributes as much as 28 per cent of global carbon dioxide emissions, according to the United Nations 2020 Global Status Report for Buildings and Construction. Thus, the industry needs to be greener. What is ESG and why does it matter for businesses and investors? With more property owners adopting certifications like LEED (Leadership in Energy and Environmental Design), it’s clear that they are realising the value of incorporating sustainability features into their buildings. If we look at industrial properties, a highly sought-after asset in this year’s investment market, facilities like the Goodman Interlink and pre-certified Westlink logistics centres are benefiting from energy savings, water efficiency and design and build initiatives. Social and wellness elements are also embedded in green buildings. Optimal workplace design and working conditions make the workspace better for everyone. From a comfortable office chair, to healthy meal options in pantries and cafes, to space for socialising and unwinding, and even to rooftop farming, the social element helps to shape whether people view a property as a premium one. The first two elements, environmental and social, could be well thought-out in the design phase, while governance is key to ensure the property is well managed in the long run. It all comes down to managing the space with an ESG-enabled approach. Prioritising diversity and inclusion among the workforce, or going paperless in the workplace, are some of the steps that companies can take These buildings and spaces are built for the long term, aligning with ESG in a forward-looking mindset. A comprehensive approach to valuation, including through the lens of ESG, suggests that investors can benefit by taking a longer view. Research by M&G Real Estate, using their own European certified buildings, found that the increased costs associated with sustainable materials and sophisticated technology can be offset by a higher rental income and higher cash flows over time. Sustainability can also enhance the value of an asset by improving resilience and reducing the impact of obsolescence. A survey of over 2,000 enterprises by Deutsche Asset & Wealth Management Investment and analyses by McKinsey & Co found that 63 per cent of respondents considered a sound ESG strategy has a positive effect on equity returns and appeals to more investors. ESG investing is hot, without a doubt. The long-term impact of the pandemic is fuelling stronger demand for sustainability and ESG policies that enable people’s well-being. Understanding a company’s ESG strategies helps valuers gain a clearer view of a possible future as well as evidence of past performance, in order to provide clients with a holistic, and more accurate, estimate of property value. The future valuation of properties must take these factors into account. We expect investors to increasingly look out for high quality properties while incorporating sustainability and wellness criteria into their value-added strategies for a long-term investment horizon, along with OpEx management and strategies to mitigate obsolescence and prolong asset lifespan. ESG will definitely play an important role in the post-pandemic era. The time to act is now, so that you can gear up your property for a sustainable future. Chester Leung is senior director of valuation & advisory services at CBRE Hong Kong