Preserving The Planet, ESG Funds in Focus

For the uninitiated, warehousing is still about transport infrastructure, services connections/capacity, and the availability of labour market is a key consideration. Over the past few years, Environmental, Social and Governance (ESG) factors have become crucial in business decisions all around the world. From macro perspectives, ESG has widened its ambit to operations including warehousing.

India being a hot trade hub, warehouse developers here are facing increased pressure to build warehouses that not only satisfy all of the traditional logistics requirements, whilst being sustainable, but also to create developments that attract and retain staff ensuring a long-term effective operation for occupiers and investors. In a nutshell, the projects should be environment-friendly, socially acceptable, and follow good governance and legal requirements.

Renewed focus

Warehousing once was about logistical support and statutory requirements. The trend, however, is changing rapidly. The application of ESG standards on warehousing (notably during cross-border operations) is slowly turning into dealbreakers and swiftly progressing towards attaining the status of statutory regulations. Apart from business standardisation, the norms have a significant social impact either through the form of sustainable logistics, external stakeholder involvement, and environment-focused investment on new constructions such as green buildings

Investor attention

The demand in the warehousing sector has phenomenally increased, owing to burgeoning demand from e-commerce, third-party and contract logistics, need for improved and diversified cold storage facilities from both end-use businesses and industries such as pharmaceuticals, consumer and industrial electronics, and engineering and manufacturing etc. Major industry players who have hitherto relied on contract warehousing have helped in consolidating it as a sector in itself, attracting investments from established real estate funds as well as sector-focused funds.

Changing considerations

Businesses and regulators in the developed world have started focusing so much on sustainability that they are willing to compromise on small-to-mid term profits in order to ensure longer, better runs. The correlative appetite that investors have for ESG closes the loophole where long term value is attributed to real estate assets.
The COVID-19 crisis has increased the awareness about, and the role of, the ESG agenda, with the majority of investors, developers and users of logistics facilities, together with the sector’s workforce and the wider public, joining the drive for higher standards and sustainability.
Warehousing businesses, particularly logistics companies, are more focused these days on the ESG credentials of the buildings they plan to occupy and operate. The factors they take into account range from carbon emissions and renewable energy to giving back to and supporting local communities. Environmentalists have been pointing out that built environments account for a lion’s share of industrial carbon footprint and shareable and sustainable logistics facilities that use renewable energy helps in reducing it. Investors would be wise not to get complacent about these factors amid a booming market and focus on working with occupiers to boost the ESG credentials.

Numbers speak for itself

A good look at the number of private equity-backed warehousing companies growing during the pandemic and later substantiate the growing trend. Firms such as ESR, Blackstone’s warehousing ventures, IndoSpace etc. have floated big-ticket deals during a time when most of the industries were busy saving their space.
Warehousing leasing transactions grew from 32 million square feet in FY 2020-21 to about 35 million sq.ft. in FY22. According to global commercial real estate services company JLL, the next two years are expected to see a growth to 80 million sq.ft.
Investment managers and private equity funds, particularly from the US and Canada, are forecast to remain major players in the industrials market in 2022, also targeting a diverse range of locations including the US, the UK, Germany, France and the Netherlands, as well as Spain, Poland and Australia.