Finance & Real Estate

2021-01-04 Andrea Beltratti, Alessia Bezzecchi

Real Estate and Sustainability: One Size Does Not Fit All

To have a sustainable economy, it is necessary to live and work sustainably in buildings that respect the technical criteria suggested by domotics. But how can we go from theory to practice?

The attention to Environmental, Social and Governance criteria (ESG) and to sustainability is a consolidated trend by now. We all take it for granted that eight billion people can live together on the planet earth only following certain basic rules that require not depleting limited resources and managing them with a very long temporal horizon.

The lifestyle each of us follows is the necessary condition for well-being and sustainability, and requires adequate buildings, that minimize the use of energy resources, are compatible with landscape constraints, and contribute to a sense of beauty. What mechanisms are available to reach these goals? These are the questions we have asked in the context of the work of the REInnovation Lab of SDA Bocconi and Assoimmobiliare. The response is variegated, but can be summed up with a sentence: sustainability in real estate can be obtained by combining many indicators and taking into account the combined effect of the various operators who are simultaneously involved in a real estate operation.

Environmental ratings of companies

In recent years, interest for ESG ratings has exploded. Initially created by small specialized consulting companies, driven above all by the urge to save the planet, the idea of giving companies a rating on non-strictly financial themes has taken hold a bit everywhere. The major international players have now joined in; consider names such as Refinitiv, S&P, Moody’s, and Bloomberg, sometimes directly purchasing the small specialized companies that had developed the algorithm that makes it possible to issue report cards on companies.

We are now in a phase of great heterogeneity, as documented by an interesting study published by Berg, Koelbel and Rigobon[1] that shows how, on average, the correlation between ratings is slightly above 50 percent, especially due to the different methods of measuring significant indicators. We can equate heterogeneity with confusion, but we prefer to consider the current phase as one of great creativity, that could in part be reduced by the entry into the arena of the European Commission, with the Directive on the environmental taxonomy.[2]

As there was a convergence over decades between the recipes for calculating financial ratings, it is legitimate to expect that a situation of less disparity will be reached also as regards the measurement of ESG aspects. Will the evolution of the industry follow what happened for financial ratings, where the process left only the three large U.S. "sisters" (Moody's, Standard & Poor's, and Fitch)? We think not, partially. First of all, for some time Europe has been more sensitive than other countries to environmental issues, as shown by the regulatory initiatives pursued. Secondly, the dimensions to be considered to give environmental, social and governance grades are very variegated and complex, and thus there is room for different recipes. Yet ratings are only the first step in real estate.

The sustainability equation in real estate

What else is needed in real estate? The market is very complex, given the multiple interactions between the primary and secondary markets and the capital markets. But even if we limit ourselves to the secondary market, the complexity is considerable. As an example, we will start with a typical commercial operation in which an owner rents a property to a lessee who uses it for its typical activities, employing people and welcoming clients. There are thus five unknown factors to make the equation work that describes sustainability in real estate: the owner, the property, the lessee, the professionals, and the end users. All five, with their behavior and business models, can contribute to the sustainability of the operation.

  1. The owner must act continuously to maintain the property in the best possible conditions, carrying out historical and predictive maintenance, and where possible equipping the building with the new products and services made available by technology.
  2. The property must be constructed in such a manner as to ensure the best use of energy resources, if possible becoming a source of energy production and not consumption, and provide solutions for a harmonic use of spaces that allows everyone to maximize productivity and well-being.
  3. The lessee makes the relevant decisions on the method and organization of work within the building, giving indications for elements such as waste management, use of resources, and the rules to be followed inside the building.
  4. The professionals have the responsibility to respect the rules and play an active part in further improving them, providing indications based on their experience as individuals who continuously use the building (the study in fact shows that some new buildings potentially, but not concretely, have lower energy consumption due to the type of use made of them).
  5. Finally, the clients must contribute with their behavior, ideally bringing the rules on sustainability decided on inside the building, to the outside as well.

As always happens in the modern economy, each person is a small piece of the machinery, that gets jammed in the presence of deviant behavior. An owner who ignores the building, without maintaining the windows and doors, inflicts a loss that no virtuous behavior can remedy, a professional who simultaneously opens the window and turns up the heat wastes resources, etc.

The elements of the machinery

The rating industry covers only part of the complex chain that determines the true environmental impact in real estate. The rating spoken of above covers one of the protagonists, and only when it becomes a part of the operation described previously. (Incidentally, in Italy this happens rarely in the absence of ratings dedicated to companies not listed on markets, given the scarcity of companies active in the stock market. This is the reason for which a growing number of ratings agencies are extending the application to dedicate themselves to all companies, both public and private). The LEED and WELL certifications cover another part, that relating to the building and its use, focusing on the potential connected to the building in question. But overall, many elements of the equation escape measurement. What is the contribution of the lessee to the sustainability of the property? Do the methods of use of the property provide a satisfactory outcome or not in relation to the metrics that define sustainability? We think that the existing situation gives rise to two clear directions of development: the first relating to the combination and adaptation of what already exists; the second to the creation of new activities and ideas.

The directions of development of sustainability

It is first of all necessary to understand how to use existing information to evaluate single situations. For example, using the detailed and transparent Refinitiv analyses as regards the rating of owners and tenants, together with the results of the LEED and WELL certifications, and indicators relating to the concrete use of buildings in a certain period of time, it is possible to obtain a much clearer image of the sustainability of a single real estate operation. The REInnovation Lab is working precisely in this direction, reflecting on the creation of a "sustainability prize" in the context of a complete map of commercial real estate activities in Italy, thanks to the active contribution of the companies that act as Partners of the Lab.

Yet we also need to reflect on the future, and use in an increasingly creative and concrete manner the sources of alternative data and Artificial Intelligence algorithms to construct automatic sustainability indicators. The road to sustainability is long, but we are at least beginning to see the entrance.


Andrea Beltratti is a Professor in the Department of Finance of the Bocconi University, where he teaches Economics of the Real Estate Market and Equity Portfolio Management, and Academic Director of the Executive Master in Finance (EMF) at the SDA Bocconi School of Management.

Alessia Bezzecchi is Associate Professor of Practice in Corporate Finance & Real Estate at the SDA Bocconi School of Management, where she is Program Director of the Executive Master in Finance (EMF) and of the Executive Program in Real Estate Finance and Real Estate (EPFIRE).


[1] F. Berg, J.F. Kölbel, R. Rigobon, "Aggregate confusion: The divergence of ESG ratings", MIT Sloan School Working Paper 5822-19, May 2019.

[2] This is the classification shared by the EU on the economic activities that can be considered sustainable from an environmental standpoint. For more information, we refer to the text of Regulation EU 2020/852: