Sustainability and ESG (Environmental, Social, and Governance) criteria have become increasingly significant in Mexico's commercial real estate market, and it's not hard to see why. As environmental awareness and corporate social responsibility gain greater prominence in society, coupled with heightened government regulations on environmental matters, the economic benefits of sustainability in this sector are becoming increasingly evident and appealing to investors, developers, and property owners.

As sustainability criteria become mandatory, companies must proactively invest in strategies, processes, disclosure, and external validation to ensure compliance.

In recent years, the growth of sustainable and ESG investments has accelerated due to several key factors. Firstly, the rising global demand for sustainable investment products stems from investors' growing concerns about sustainability and corporate responsibility, leading them to withdraw funds from non-sustainable companies. Furthermore, increased transparency and corporate information disclosure have bolstered market trust. The entry of new generations, such as millennials and centennials, who prioritize positive impact on the world, has heightened interest in environmental and ESG projects. Lastly, investments with sustainable and ESG criteria have proven to be less volatile and more profitable, attracting performance-conscious investors.

What is sustainability and ESG?

Sustainability and ESG criteria are related but distinct concepts in the corporate and investment management realm.

 Sustainability refers to the ability to meet present needs without compromising the ability of future generations to meet their own needs. In other words, it entails balancing economic, social, and environmental development to ensure a sustainable future. Sustainability involves responsible management of natural resources, climate change mitigation, social equity, and other factors to create a more equitable and habitable world. Sustainability aims to create shared value, generating a greater positive impact than negative through strategic real estate services in dynamic locations that benefit tenants, investors, and the natural environment.

On the other hand, ESG criteria pertain to the three key areas that companies and investors evaluate to measure sustainability and corporate responsibility. These considerations are increasingly used in investment assessment and business decision-making, reflecting the importance of seeking short-term economic benefits and long-term commitment and impact on the environment and society.

The Environmental aspect pertains to a company's practices and policies related to its environmental impact. This includes waste management, energy efficiency, and greenhouse gas emissions. Environmental efficiency fosters innovation and has economic benefits such as reduced operating costs and improved product and service quality, which helps retain and expand the customer base and promotes the revaluation of by-products.

The Social aspect relates to a company's impact on its immediate socio-economic environment and internal human resources structure. It involves issues such as relationships with and among employees, diversity and inclusion, workplace safety, human rights, value chain support, and fair business practices. Its application improves productivity efficiency by reducing costs, improving the work environment and conditions, and enhancing the company's image.

Governance refers to the corporate governance structure and decision-making in a company. This includes transparency, corporate ethics, acquisition practices, board independence, and accountability. On a socio-economic level, this aspect contributes to job creation and stakeholder groups, as well as helping to maintain or increase market share and boost employee motivation.

Economic Benefits of Sustainable Properties

Adopting sustainable practices in Mexico's commercial real estate market offers a range of notable economic advantages. These potential benefits include improved operational efficiency of buildings, circular economy practices, reduced energy and resource costs, increased value of real estate assets, attraction of high-quality tenants, and mitigation of financial risks associated with energy price volatility and changes in environmental regulations. Here are some of them:

1.- Energy Efficiency and Savings: Sustainable properties stand out for their energy efficiency, reducing utility costs such as water and electricity. For instance, FIBRA Uno (FUNO) achieved remarkable results. In a SiiLA ACADEMY 2023 session, FUNO's Sustainability Director, Ana Karen Mora, noted that between 2019 and 2022, the trust managed to reduce its energy consumption costs by up to 50%, resulting in approximately 280 million pesos in annual savings. Such savings translate into lower operational costs.

2.- High Demand and Property Value: Sustainable properties may have a higher market value than traditional ones. This is not only due to the base of investors and tenants seeking long-term economic benefits but also because sustainable properties, typically located in strategic areas, experience high demand. This allows owners to charge higher rents and increase their operating income. In this regard, Ana Karen Mora from FUNO mentioned during SiiLA ACADEMY 2023 that certified spaces can attract larger tenants who rent for longer terms, even at the same cost per square meter, ensuring income stability. In the case of FUNO, in the Reforma office corridor in Mexico City, the trust reported higher rents (from 12% to 20%) and higher occupancy than non-certified properties.

3.- Increased NOI Margins: Reducing operating costs through energy efficiency and increased operating income due to high demand and potential increases in square meter market prices positively impact Net Operating Income (NOI). For example, Centrum Park in Tlalnepantla, Mexico City, illustrates. According to Ana Karen Mora, this set of offices converted into industrial warehouses, with five LEED Gold certified buildings, has 20% higher NOI than Corporate Tlalnepantla, located right next door.

4.- Preferential Rate Bonds: In Mexico, there are two types of bonds or credits labeled as "tagged" and "untagged" or "linked to sustainability." Tagged bonds are earmarked for specific investments in energy, water, waste, and security, such as acquiring solar panels. They come in climate change, green, social, and sustainable categories. In contrast, untagged bonds do not have a specific use but must comply with ESG criteria and indicators. This benefit implies liquidity generation and access to capital for capital expenditure.

5.- Government Incentives: The Mexican government offers tax incentives, subsidies for green technologies, and loans at preferential rates to promote investment in sustainable properties, making them even more attractive from an economic perspective. For example, Article 276 of the Mexico City Fiscal Code states that individuals or entities engaged in recycling or reprocessing part of their solid waste to combat environmental degradation may obtain reductions in the Payroll Tax: 20% if they recycle between 33% and 44% of their waste, 30% if they recycle between 45% and 59%, and 40% if they recycle between 60% and 100% of their solid waste.

Sustainability addresses the growing demands of consumers and society at large and represents an opportunity to drive long-term profitability in Mexico's commercial real estate market. For more information on this and other topics, explore SiiLA REsource or contact us at contacto@siila.com.mx.