The impact of Environmental, Social and Governance (ESG) attributes on the performance of listed real estate within Europe.

The intensification of the climate change debate has seen a shift globally within investment mandates and undoubtedly sharpened focus towards Environmental, Social and Corporate Governance (ESG) actions. Consequently, the real estate sector has witnessed increased focus on the evolution of ESG within investment mandates to reduce information asymmetry, financial irregularity risks whilst enhancing risk profiling and firm value. Despite this heightened attention, there has been mixed findings investigating the role of ESG and performance. Indeed, despite the fact that ESG is increasingly dominating boardroom agendas, criticisms remain namely; that not all of components have received adequate or equal attention, while many companies have struggled to put ESG pledges into practice. Consequently, the relationship between ESG and financial performance of listed real estate has been a topic of much debate amongst academics, practitioners and policy-makers.

This study, applying Bloomberg data and annual financial reports of the sample companies for five European listed real estate markets selected on the basis of their maturity of ESG development over the period 2010-2022, explores whether, and to what extent, the performance of the real estate companies, can be attributed to or explained by the implementation of ESG policies at the corporate level after accounting for firm-level characteristics as well as different real estate sectors. We employ Pedroni’s Cointegration and Granger (Wald exogeneity) Causality methods for determination of long-run cointegration and short-run causal relationships permitting insights into the ESG factors that influence the stock price performance of the listed real estate markets over time. Secondly, a number of panel regression models are constructed to investigate whether and to what degree the ESG attributes can explain the firm-level performance. Our key findings highlight there to be no statistical evidence that ESG attributes depress the performance of the listed real estate companies proxied by raw return, Sharpe and Tobin’s q, or produce statistically insignificant results. The Causality analysis determines that some ESG attributes actually Granger-cause raw return, adjusted return and Tobin's q. Our analysis, as evidenced within the Pedroni Cointegration tests further reveal strong long-term interlinkages between the high majority of the ESG attributes and the three performance indicators. Based on the results of the Granger Causality models, we further find that the three aggregate Bloomberg ESG performance scores all Granger-cause raw returns and the Sharpe ratio in the long-run suggesting that higher environmental, social and governance performance scores of companies should lead to a superior return on both the raw and risk-adjusted basis.