Is Investing in Sustainability Financially Rewarding? A Quantitative Study of Public Real Estate Firms in the EU

Abstract

Background: Since 2015, when the United Nations agreed on the 2030 Agenda for Sustainability Development, actions and requirements have been obligated for industries and companies all around the world. The sector with the largest carbon footprint is the building sector which accounts for 30% of greenhouse gas emissions globally and it consumes 40% of the world’s energy. Therefore, it is pivotal that real estate firms contribute towards the Paris Agreement and develop sustainable climate strategies. Real estate firms investing in greener buildings have given rise to a new research field in recent years. Despite the many obvious benefits of green buildings for occupants and the wider society, some researchers suggest that there is a lack of evidence in terms of the financial benefits for real estate firms and that the additional costs of creating greener buildings often act as an obstacle for investors. Although, other researchers have found clear financial gain in terms of increased income, higher property prices and less operating costs. Purpose: Our purpose is to investigate whether real estate firms in the EU that invest actively in sustainability are financially rewarded. Method: We utilize a similar approach as studies by Eichholtz, Kok and Yonder (2012), Fuerst (2015) and Morri, Anconetani and Benfari (2020) where profitability will be measured through ROA and ROE as dependent variables. Our study spans from 2016 to 2019. Financial data and ESG Reuters Scores were collected from Thomson Reuters datastream. ESG GRI and ESG GRESB information were collected from each website. Interest rates were collected from ECB. We use a random effect regression model and control for country and cluster on companies. Conclusion: This study has raised the importance of contributing to a more sustainable world and more specifically, the actions of the real estate sector. Previous studies find that the initial cost of entering into a more sustainable business strategy acts as an obstacle for firms to take that first step (Mariani et. al., 2018). However, the majority of previous studies do highlight the benefits that sustainable investments have on firm performance (Leskinen, Vimpari and Junnila, 2020). Therefore, we found our results surprising as our study only finds negative significant results for two of our chosen sustainability proxies, suggesting that the firms in our sample actively engaging in sustainability are not financially rewarded. Nonetheless, we conclude that investing in sustainability entail large initial costs, at least in the short-term. Although, as prior research has proven, it can bring long-term benefits in the form of higher rental income, selling prices, and not to mention contributing to the preservation on earth.