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Commentary

From ESG to GSE 

Gregorio Esteban, CEO of Miraval Holdings, argues that progress on governance and social considerations is prerequisite to addressing environmental challenges in Latin America’s property sector.

The challenges of integrating ESG in Latin America are huge. Being an emerging market, the priorities in the region are at a different stage than in more developed parts of the world. The nature of the business environment and the obstacles that come with that are not the same. It is not possible to integrate ESG factors and considerations in Latin America in the same way as in Europe, for example.

In the real estate sector in Latin America, the primary focus of construction companies is on delivering housing, because there is a housing deficit, and on keeping costs low, because buyers aren’t yet willing to pay extra for the latest European sustainability standards. As a result there is little ESG integration – as it is perceived in Europe – at this time.

That doesn’t change the fact that sustainability is a hugely important factor in the region’s future, as it is for the future of the planet. So what can the industry, and Latin America more generally, do to make progress in this area?

Laying the social foundations

When approaching sustainability, one ultimately needs to prioritise what is realistic – both within the industry and the region. ESG must therefore be viewed asymmetrically when it is applied to Latin America.

A key place to start is with the ‘S’ in ESG. In its simplest terms, this means creating a future for people. The generation of long-term, high-quality jobs; better skilled workers and better education; increased wealth for families, communities and the region. These are all examples of what needs to come first, as are factors such as gender inclusion and socio-economic justice. Ultimately, if people don’t have a future, what is the point of thinking about, for example, the carbon footprint? Only once these foundations have been laid can priorities shift towards the ‘E’ in ESG.

A crucial part of the ‘S’, of laying these foundations, is taking into account as many of the UN’s Sustainable Development Goals (SDGs) as possible. An example, for our company, would be the immense importance of providing clean water and sanitation in Latin American settlements.

Over time, as progress is made in these areas, the transferring of European know-how, or lobbying for the introduction of European construction norms and standards, can start.

Companies must step up

If you take into account inflation, construction costs, high interest rates and more expensive mortgages, the cost of being sustainable in any region is a key challenge. So another question that needs to be addressed is: who is going to pay for sustainability in Latin America?

Ultimately, the only way to increase the demand for a sustainable product is to deliver it without a higher price. Because of this, the financing for the transition to sustainability – which is not cheap – falls into the hands of the companies.

In the real estate industry, developers need to cover the needs of the buyer while introducing sustainability and ensuring a difference in price isn’t noticeable. How can this be achieved? The rate of return on the funds being invested has to be lower, interest rates lower, the fiscal tax benefits higher, the benefits for the company more limited, and the final price has to have less of an impact on the buyer. This is the direction we must try to head.

Internal, regional and international metrics

At the moment, the adapted and asymmetric ESG metrics for an emerging market like Latin America are being developed. Sustainability, however it is approached, must operate within a very adaptive framework. There needs to be flexibility around local particularities, environment, social needs and sector.

The way this can be addressed is by property developers and real estate investors first incorporating internal metrics, then the metrics of the country a company is operating in – each country in Latin America, of course, has its own particular metrics – and working towards getting international certifications such as LEED and BREEAM.

Our internal metrics are our starting point, based on GRI standards. Our company, for example, focuses on locating construction materials from the closest source possible and limiting Scope 2 emissions in the construction process by making sure any type of fuel we use is as efficient as it can be.

Introduction of new technologies

When looking at the need for deployment of new technology in working towards a net zero future for the region, the first thing to consider is what we can do right now. For the construction industry, what is possible at the moment is framed by two main things.

One is regulations related to construction – certain regulations must be adhered to in each country in the region. For instance, the laws and the regulations for architecture and engineering in Colombia do not allow the use of wood as a renewable source for building. The second is the availability and suitability of any already readily available construction technology. Technology is not necessarily easily deployed because it often has to be taken from overseas. It must be adapted to the place where building is happening and to the near future, with the already perceived effects of climate change a strong consideration.

Despite these challenges, there are simple things that we can do now to make buildings energy efficient in a passive way, for example insulation of walls and windows.

The increasing prominence of off-site building is also set to be a game-changer in making the building process more energy efficient. This is where the modularised elements of a building – for example walls, kitchens and floors – are produced off-site and then later taken to the site. This makes logistics, planning and time management easier, and helps reduce the amount of capital and energy spent on workforce, waste management and supply chain. The concept is known as ‘on-site assembly automation’ and it is the future.

Other future solutions in the region include technologies related specifically to the supply chain carbon footprint. This may not be something that is not usually tackled by small local companies from the construction ecosystem, but the supply chain is a big part of the carbon footprint.

We are not there yet, but because of this there is a huge opportunity to get these things right –  from the start of the ESG integration process – in Latin America, without the need to change the approach further down the line as we see in the developed world. Little has been done in Latin America so far, so there is an unprecedented opportunity to build and implement proper, clear frameworks from a very low base.

As we start out on that journey, it is helpful to view the ‘G’ as the base of ESG implementation in Latin America, and the ‘S’ as a must. The hope is that these will then maintain and develop the ‘E’. So, from the Latin American perspective, it really should be GSE rather than ESG.

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