Why Commercial Lenders and Originators Should Learn ESG

“ESG has really been a targeted niche until last year because the major market players weren’t supporting it in any significant way,” Eltorai said. “But now we see how often it is mentioned as a factor. We’ve seen calls from the head of the SEC asking for comment on whether ESG should be included in mandatory disclosures. BlackRock also backed the idea and while BlackRock isn’t the whole market, it’s the largest asset manager in the world, so its voice is a bit louder.

Eltorai explained that of the three pillars of ESG, we are likely to see environmental factors play most prominently in the commercial real estate space. Carbon footprints and carbon neutralization strategies are quantifiable, measurable and are already attracting significant inflows of capital from the residential and commercial side. The tactile nature of environmental improvements is particularly important for the calculation of an ESG ‘score’, a mechanism by which the overall sustainability of an investment can be quickly communicated.

Even though environmental factors currently dominate the ESG load in the commercial space, the social impacts of commercial developments are increasingly being considered as an ESG factor. Eltorai gave the example of affordable housing, which is considered a net positive for a transaction’s ESG score due to its positive social impacts. Although corporate governance is somewhat more amorphous, it is also likely to play an outsized role for CRE companies and publicly traded investors and more immediately subject to the whims of investors.

Eltorai believes that all three aspects of ESG will become increasingly important given the country’s current political climate. President Biden has made fighting climate change and improving access to affordable housing key goals of his administration, while improving the overall diversity of access to opportunity in America under -tends many Democratic Party policies. This could mean that regulators will put even more emphasis on ESG factors in the future.

As burdensome as the new regulations are, commercial mortgage professionals shouldn’t greet the rise of ESG with a whimper, Eltorai said. Rather, he believes that understanding ESG could open up a world of opportunity for mortgage professionals and for lending institutions. Lenders, he noted, will increasingly see incentives to fund ESG-friendly projects. Capital is also likely to flow to ESG-friendly lending institutions to help them achieve lofty sustainability goals.

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