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Brad Siegal is a shareholder in Buchalter’s Nashville office and a member of the real estate practice group, with particular expertise in multifamily acquisition, disposition and development in the southeastern United States. In his representation of a large mixed-use real estate investment trust, he has participated in many multifamily and multifamily portfolio transactions.
Heather Wright is a shareholder in Buchalter’s Nashville office, where she helps commercial real estate clients identify operational risks, manage risk through insurance, and maximize insurance recovery with a variety of commercial insurance policies.
The opinions are the authors’ own.
Over the last decade, environmental, social and governance (ESG) considerations in commercial property development have become quite widespread.
Beyond familiar green building certifications such as LEED, investment firms in the multifamily asset class are increasingly using ESG as a criterion for evaluating investment opportunities. These include:
- E: Environmental factors typically include issues such as greenhouse gas emissions, climate change, carbon footprint, waste management and pollution.
- S: Social factors refer to the impact on people and communities within an organization, such as diversity and relationships, health and safety, and inclusion concerns.
- G: Governance factors relate to items such as succession planning, executive compensation, board and shareholder governance, in addition to diversity and structure.
ESG factors considered in the development or analysis of the investment could include a reduction in pollution through the use of improved materials and technology, the use of Energy Star appliances, the incorporation of renewable energy such as solar energy where possible, and the provision of advanced technology such as thermostats and similar technologies to help improve environmental awareness and conservation.
Assets that do not meet emerging efficiency or resilience standards can quickly lose value, complicating replacement cost assessments. Concerns about stranded assets are increasing as environmental standards and market preferences evolve. As a result, the consideration of these issues in the development of any project has become essential for both developers and investors.
Insurance considerations
Of particular relevance to the environmental consideration in ESG analysis is insurance, both the cost and the scope of coverage.
In recent years, physical climate risk, such as frequent and severe storms, floods, wildfires, sea level rise and extreme temperatures, have increased expected losses for insurers. The increase in losses has led to reduced market capacity and tighter underwriting, contributing to a significant increase in premiums for both property and liability insurance.
Brad Siegal
Permission granted by Buchalter
Environmental performance is becoming a premium differentiator. Properties that demonstrate verified sustainability and resilience measures (energy efficiency, flood defences, bushfire hardening) may have access to better terms, credits or capacity.
Conversely, poor ESG metrics can increase costs or limit availability. Documenting mitigation investments and obtaining third-party green certifications can leverage negotiations with underwriters.
Similarly, insurers may require upgrades as a condition of reinstatement or limit payment for outdated rebuilds. Owners and investors should factor green adaptation costs into valuation planning, negotiate policy language about inflation and upgrade coverage, and plan for phased upgrades to mitigate the risk of stranded assets.
From an environmental risk perspective, soil and groundwater contamination, hazardous building materials, and indoor air quality issues can result in third-party claims, repair costs, and reduced property value. Many standard commercial property policies exclude or sub-limit pollution losses, requiring owners to rely on separate environmental liability products or pollution extensions.
protect yourself
Sound Phase I/II environmental assessments, environmental management systems and adequate pollution liability coverage are essential steps for risk transfer. Accurate disclosure and compliance with warranty obligations are also critical.
Heather Wright
Permission granted by Buchalter
Investors, lenders and counterparties expect environmental transparency and non-disclosure of known contamination or material hazards that may jeopardize coverage or invite subrogation. Landlords must maintain consistent disclosure practices, coordinate insurance filings with loan and lease guarantees, and promptly notify insurers of material incidents or changes of location.
The increase in both the frequency and severity associated with environmental and catastrophic losses creates unique and acute insurance claims challenges. The scale and scope of damage often overwhelms local claims infrastructure, resulting in delayed inspections, slower claim payments and shortages of materials as well as experienced and qualified contractors.
Coverage disputes multiply over issues such as causation and proximate cause and concurrent cause and anti-concurrent cause issues, and the application of sublimits also delays claims handling. In addition, risks of business interruption beyond direct physical damage can increase dramatically. Significant environmental events can disrupt utilities, supply chains and tenant operations and access, resulting in lost revenue and additional expenses.
Proving these business interruption losses can be complex, time-consuming and expensive.
Asset owners, investors and managers should conduct rigorous environmental due diligence and ongoing monitoring, and align insurance programs to cover pollution and climate-induced hazards. Investing in resilience measures and documenting these investments will improve the sustainability, insurability and marketability of real estate portfolios.
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