Finance & Real Estate

2021-03-23 Andrea Beltratti, Alessia Bezzecchi

Seeking Well-being by Measuring Sustainability

The growing amount of attention paid to the issue of sustainability in the real estate sector, together with the measurement of the phenomenon, will increasingly allow for incorporating in market prices elements that until a few years ago were excluded from operators' radar; above all, parameters linked to ESG factors

Microeconomy teaches us that the theoretical foundations of national accounting, i.e. the known relationship between supply and demand at the aggregate level, are linked to choices made by society aimed at the best management of capital stock and the maximization of long-term well-being. In a functioning economy the use of each resource must be balanced and aimed at the creation of prosperity. Thus, the relevant capital stock must include everything that is useful and necessary for social well-being, meaning human, physical, social, and environmental capital. Without a specific method of measurement, though, it is difficult for managers, investors, and policymakers to follow the right path. But how do we measure aspects that are so different from each other, especially in light of the need to balance the accounts of various types of economic initiatives?    

In a previous article[1] we spoke of the acronym SESG to indicate the need to think in general terms of the now well-known environmental (E), social (S), and governance (G) factors from the standpoint of sustainability (the initial S stands for sustainable). This certainly needs to be done with a long-term view, because sustainability means first of all maintaining the economic and financial equilibrium of a single investment project of a company or nation, a sort of intertemporal budget constraint that forces economic actors to reflect on the future allocation of resources. Never as before have we realized the need to avoid social and environmental crises, that were unthinkable until fifty years ago, but are increasingly at the center of attention today. Thus our efforts in pursuing "ESG-centric" policies can never lose sight of the overall long-term picture and must focus in particular on the least desirable scenarios.

The conceptual framework is easy to describe, but the practical implications are hard to implement, in particular due to measurement error. In recent years, we have seen exponential progress in regard to ESG factors thanks to the efforts of ratings agencies, consultants, and data providers. We are certainly in an initial phase, one of experimentation, as shown by the low correlation between the ESG judgments formulated by various analysts. Experimentation is very positive and also inevitable, given that the complexity of the phenomenon does not allow for immediately establishing what the most proper definitions are. In any event, for those who are worried that creativity will lead to confusion, the initiative of the taxonomy, at the center of the European Commission's "green finance" project, should allow for a common conceptual framework, at least as regards the environmental factor. In the context of the research conducted at the REInnovationLab of Assoimmobiliare and SDA Bocconi, we have attempted to autonomously measure the combination of sustainability and ESG, starting from considerations on elements regarding the environment, social interaction, value added, innovation and technology, using a purely statistical approach. Not being able to assign a specific weight to each single component due to the lack of a shared theoretical framework, we collected the available evidence for Italy, leaving the identification of the importance of each variable to the statistical technique of the main components. The list is very broad and includes elements such as life expectancy, causes of death, education, number of crimes, availability of green areas, efficiency of water systems, proportion of innovative businesses, and income and assets. The main components method then allowed us to construct four indicators and create an average defined as the "sustainability index."

What is the practical relevance of the sustainability index? We asked this question in the context of the analysis of the evaluation of the OMI zones for 2019, the year prior to that of the pandemic crisis. To avoid attributing that index an importance that is actually traceable to other elements, we constructed an econometric model that also takes into account location (the traditional element important for real estate assessment), the state of the property, the overall economic characteristics of the municipality in which the OMI zone is located (summarized with the presence or absence of an industrial district), and the intended use. The results show that our sustainability index is statistically positive in the context of the econometric model, and indicate a percentage variability of real estate prices of between 5 and 20 percent depending on type of use. Our results also show that location is always important, but less than the state of the property, and that belonging to a district provides an increase of value comparable in terms of magnitude to that of the sustainability indicator.

It is comforting to know that the prices of the real estate market incorporate considerations linked to sustainability. This allows for the possibility to conduct further research to measure with increasing precision the identity of SESG, an element that in turn is useful to allow all actors to better orient themselves among the various options. Our hope is that the attention to sustainability, together with the measurement of the phenomenon, makes it possible to increasingly incorporate in market prices elements that until a few years ago were not on operators' radar. The relative prices of various assets are signals to orient choices: the market system is imperfect, but until now it has functioned in a reasonable manner, although it must be modified to take into account those elements that are now indispensable to allow for an increase in well-being, and not only in operating income.    

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



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


[1] "SESG for Asset/Wealth Management and Real Estate", Economia&Management, November 22, 2020.

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