Both real estate investors and tenants alike are more discerning than ever, and many now include sustainability as a major factor in their choice of property.
One of the popular standards for sustainability is the environmental, social, and governance (ESG) framework. As an investor, following these principles can attract and retain high-quality tenants, mitigate future risk, and provide long-term value for your investment.
How do ESG standards apply to triple net or NNN properties, in particular? Realized 1031 is here with an insightful guide to help you understand how these principles may impact your assets.
The Basics of ESG
What does ESG mean in the context of investing? These standards help properties become more sustainable in three key areas.
- Environmental: The asset must integrate systems and practices that help diminish its environmental impact and carbon footprint.
- Social: The social aspect pertains to the ways an asset can contribute to the well-being of tenants, employees, and the surrounding community.
- Governance: Meeting governance principles means having transparent management practices, compliance, and ethical operations.
NNN ESG: Ways To Make Your Property Meet Sustainability Goals
Having a property under an NNN lease may seem limiting, considering how the tenant handles three of the major net operating expenses. However, investors have the power to invest in properties that incorporate systems and processes aligned with ESG goals.
Environmental
The operations of real estate properties often result in high levels of emissions, accounting for approximately 40% of the total global carbon emissions. This high amount puts pressure within the sector to integrate solutions that help reduce energy use and carbon footprint. For NNN property owners, following environmental principles could mean the following.
- Use of renewable energy sources like solar panels
- Integrating energy management practices, such as installing smart HVAC and lighting systems
- Having equipment or systems that are LEED or ENERGY STAR certified
Social
The social considerations go beyond the physical impact of a property. These standards look at how a real estate asset and the tenant affect the community.
- Tenant Reputation: Investors are better off with tenants who follow strong social practices, such as fair labor practices and community engagement.
- Community Impact: NNN assets located in thriving, accessible communities often benefit from stronger tenant performance and lower turnover.
- Human Capital Management: How does the tenant manage employees? Are there health and wellness initiatives? Is there an effort for inclusion and diversity?
Governance
Investing in NNN properties that have tenants that follow strong governance principles can help reduce risk. If tenant selection has not yet started, investors should look for those that offer transparency and reliable reporting, especially if the tenant is a publicly traded company.
Property owners also need to follow governance principles as part of their oversight processes. Monitoring tenant performance and ensuring regulatory compliance are some of the things you can do to protect your investment value.
Why Triple Net ESG Matters Today
Triple net assets may seem like a passive investment class, and they are. However, following ESG principles, which require more active involvement, has now become a critical aspect of NNN investing. During the selection process, choosing ESG NNN properties helps mitigate risk and attract more high-quality tenants. After acquiring the triple net asset, the continuous adoption of ESG standards helps lower vacancies, enhance brand reputation, and prepare property for future regulatory changes.
Wrapping Up: ESG in Triple Net Investing
Property owners, tenants, and communities now recognize the value of ESG principles, especially when applied to real estate assets. For investors, choosing NNN properties and tenants practicing ESG standards can help protect investments from various risks and improve long-term value. Your building becomes a more resilient and attractive investment in a market that increasingly values sustainable and socially responsible assets.
Sources:
https://www.energystar.gov/products
https://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp
