The impact of ESG factors on performance of real estate equities

This paper examines the influence of ESG practices on the market performance of Public Real Estate Companies (PRECs), as reflected by Tobin’s Q, and their financial performance, assessed through profitability and risk profiles, using a global sample of firms from 38 countries between 2015 and 2021. Employing an instrument-based methodology (2SLS) and a Heckman correction to address concerns about endogeneity and selection bias, our global analysis reveals that ESG-aligned firms demonstrate higher market performance and improved operational efficiency through reduced capital costs and improved risk management, despite initial setbacks such as negative Net Operating Income (NOI) and higher G&A expenses. In-depth analysis shows that the Environmental (E) and Social (S) components follow a similar trend, though the (E) component has no significant effect on systematic risk. While the (G) component has not demonstrated significant effects on firm market performance, its influence on improved risk management remains relevant. Regional characteristics and distinctions between developed and emerging markets introduced subtle nuances in our analysis, emphasising the crucial role of local contexts in influencing these relationships. These findings serve as a catalyst for investors, stakeholders, and real estate companies to incorporate these strategies into their investment decision-making processes.