ESG compliance: Indian real estate on learning curve

Environment, Social, and Governance (ESG) is a framework to assess an organisation’s business practices and performance based on sustainability and ethical issues. There has been a baggage of legacy issues due to localised nature of business, as well as the absence of industry-accepted ethical practices when it comes to the Indian real estate sector. A perception has gained ground that the Indian real estate is neither bothered about sustainability issues nor any ethical practices. 

Every developer had his own set of stories with the adoption of sustainable practices and overall business ethics. However, with the change of market dynamics and evolving regulatory framework, ESG is gaining momentum, and the sector is on a learning curve of ESG compliance. But the compliance framework is still at a nascent stage and limited to a handful of leading and listed developers. 

Therefore, critics are well within the rights to question the overall compliance willingness, standards, and transparency, be it with ESG, Corporate Social Responsibility (CSR) or the RERA mandatory disclosures. The real estate stakeholders have their own reasons for slow adoption amidst the challenging business environment in the real estate sector. 

What is ESG?

Environmental: Environmental aspect includes use of natural materials, protection of natural resource conservation, renewable energy and energy efficiency; waste management and reduction, pollution treatment, climate change adaptation and reducing carbon footprint.

Social: Social aspect includes inequality, gender diversity, working conditions, labour practices, safety, human rights, and consumer protection, community relations, supply chain transparency, and philanthropy.

Governance: Governance includes corporate board & management structures, company policies, standards, information disclosures, auditing, regulatory compliance issues, avoiding conflict of interest, oversight issues, accountability issues, transparency and ethical violations. 

Some questions need to be looked at:  

1. Why does the Indian real estate still appearing to be lagging on the global compliance reporting standards?
2. Why ESG seems to be more for academic purposes than actual on-ground implementation?
3. CSR is more about voluntary charitable initiatives for most of the developers. Why can’t Indian developers adopt it as a strategic brand vision?
4. Are compliances not taken seriously due to lack of incentives/disincentives for its adoption?

Industry standpoint

The industry stakeholders maintain that the Indian real estate sector faces several challenges in aligning with global compliance reporting standards. The primary issues include the need for standardised reporting frameworks and insufficient regulatory mandates. Although frameworks like the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Financial Disclosures (TCFD), and Global Real Estate Sustainability Benchmark (GRESB) are gaining traction, their adoption is still at nascent stage. 

Moreover, many real estate developers in India operate on thin margins, and the immediate costs associated with implementing and maintaining these standards can be a deterrent. With India by and large being a cost-conscious affordable housing market, the developers are neither aware of nor have any expertise in these frameworks.

Nirbhay Lumde, Senior Vice President, ESG, Prestige Group said while it’s true that ESG has historically been seen as theoretical concept, this perception is changing fast. The increasing frequency of climate-related events and a growing awareness of social issues drive real-world applications of ESG principles. For example, developers are now integrating green building practices and renewable energy solutions into their projects. However, the on-ground implementation of ESG principles in the Indian real estate faces challenges, such as higher initial costs and lack of immediate financial returns. 

“There is also a need for more robust enforcement of regulations and standards to ensure compliance. The key is for developers to recognise the long-term benefits of ESG, such as improved investor confidence, reduced operational risks, and enhanced brand reputation. As more stakeholders demand sustainable practices, ESG implementation will become more of a necessity than a choice,” added Lumde.

Vimal Nadar, Senior Director and Head, Research at Colliers India is of the opinion that adoption of a comprehensive ESG based approach is on rise in India. Real estate developers, investors, and occupiers have started recalibrating business strategies to incorporate key ESG elements, particularly with respect to sustainability. SEBI’s Business Responsibility and Sustainability Reporting (BRSR) guidelines make it mandatory for the top 1,000 listed Indian companies to report their performance against standardized parameters.

“Adoption of sustainable elements has been more prominent especially in the commercial market in India. Of 730 Mn square feet of Grade A office stock in six major cities of the country, over 60% is already green certified. Furthermore, close to two-thirds of occupiers in the past one-two years have been taking up office space in green certified buildings. Increasing ESG awareness is also reflected in real estate stakeholders’ commitment by means of incorporating strategic goalposts in the wake of meeting the defined long-term net zero goals,” added Nadar. 

Critics Corner

However, the critics say that more than challenges it is the lack of intent among developers that is behind its poor adoption. Take for instance, CSR, where the Indian developers fail to understand that when integrated into a company’s core strategy, CSR can significantly enhance brand value and stakeholder trust. To view CSR as a regulatory requirement rather than a strategic opportunity needs a mindset change from traditional to business approach, where immediate financial returns are prioritised over long-term societal impact.

Requesting anonymity, a CSR consultant said that forget ESG that requires additional spending, even the basic CSR framework is missing with most of the real estate companies. According to him, even the leading ones are not having any specialist to execute what essentially is a specialist job. 

“The mandatory CSR budget is mostly exhausted with the mindset and focus to channelise the expense in a way that ROI is tangible rather than an intangible long-term brand building around the communities. CSR activities are mostly carried out by the developer’s own sister companies and not with the CSR focussed third parties,” the consultant said.  

The ground reality is that many developers view compliance as an additional cost rather than a beneficial investment. This is primarily due to the need for immediate tangible benefits. The current regulatory landscape in India needs to provide more incentives to encourage strict compliance with ESG standards. A strong regulatory framework that includes incentives and disincentives must be introduced to change this perception. 

Incentives for ESG complaint developers

•     Tax benefits 
•     Subsidies for green projects
•     Extra FSI
•     Preferential land allotment
•     Faster project clearance
•     Preferential treatment in government contracts for compliant developers

Disincentives for ESG non-compliance

•     Strict penalties for non-compliance 
•     Public disclosure of non-compliant companies 
•     Finance at high rates
•     Limited access to financing from ESG-conscious investors

Conclusion

ESG compliance needs a concerted effort by all stakeholders. Creating a culture of compliance requires collaboration between the government, industry bodies, and developers. The real estate sector can move towards more sustainable and responsible practices by aligning financial incentives with compliance goals. Industry bodies and regulators must provide clear guidelines, training, and incentives to bridge this gap. The Indian real estate sector must embrace a more transparent and consistent approach to ESG reporting to attract global investors who increasingly prioritise sustainability and governance in their investment decisions.

—The author is chief executive officer at Track2Realty.