The Age of ESG: Adoption of Sustainable Practices in the Malaysian Real Estate Market Set to Create A Positive Impact

With the paradigm shift to embrace sustainable practices on all fronts, the ESG agenda is becoming increasingly significant. The three pillars that make up ESG (environmental, social, and governance) collectively drive sustainable operations and performances, and will continue to impact wider markets positively, especially the real estate markets, according to Knight Frank Malaysia’s white paper, The Age of ESG. The first in a series of ESG-focused research
specific to Malaysian real estate, this paper is focused on the industrial sector with more sector-
specific papers to be released throughout the coming year.

According to Group Managing Director of Knight Frank Malaysia, Sarkunan Subramaniam, “It is
essential to foster resilience in real estate portfolios by anticipating risks and minimising the disruption from all corners following the increased emphasis on sustainability and climate change mitigation through ESG frameworks.”

Numerous concerted global efforts such as United Nations’ historic Paris Agreement, 17 Sustainable Development Goals (SDGs), and Net Zero Coalition has solidified the popularity of the sustainability agenda over the years. Locally, Malaysia is committed to carbon-neutrality pledges through its 12th Malaysia Plan of lowering greenhouse gas emissions by 45% of the nation’s GDP by 2030 and becoming a carbon-neutral country by 2050 at the earliest, on top of sustainability-related tax incentives being rolled out under various government initiatives.

Recognising the need for action, leading companies are implementing initiatives towards carbon-neutral operations on top of elevating social and governance standards as the industrial sector is often labour intensive with large energy and carbon footprint. With time, industrial parks that had little to no central management, have taken various forms such as an agro-industrial parks (AIP), eco-industrial parks (EIP), and smart industrial parks (SIP). The emergence of well-planned and professionally managed industrial parks shows the transitional shift toward a new generation of industrial developments with an emphasis on ESG attributes and advanced technology adoption.

“The new generation of industrial parks should be well-planned master industrial developments
capable of attracting high-value industries by pivoting on ESG fundamentals and technology
advancements. This will further strengthen Malaysia’s position as a key destination for high-value manufacturing and global services in Asia,” concurred Allan Sim, Executive Director of Land and Industrial Solutions, Knight Frank Malaysia. The concept of EIPs has gained traction as an instrument to implement inclusive and sustainable industrial development in line with the SDGs, with examples of existing EIPs being the Industrial Zone NO-Sud, Austria, and the Ulsan Mipo and Onsen Industrial Park, South Korea.

As ESG continues to be a game changer, there is an expected flight to quality driving the occupier requirements. Green-rated industrial developments have seen solid growth over the years; a strong testament to a transition towards greener and more sustainable concepts in industrial developments. The gross floor areas (GFA) of GBI (Green Building Index) rated industrial developments (new constructions and existing buildings) have grown significantly from circa 400,000 sq ft in 2013 to circa 9.4 million sq ft in 3Q2022.

In line with the Selangor Smart Action Plan 2025’s agenda of becoming a Regional Smart State by 2025, the State of Selangor has introduced the Selangor Managed Industrial Park (MIP) Standard Guidelines, a development standard focusing on sustainable industrial park developments of no less than 200 acres in size. Some of the managed industrial parks and green industrial premises that integrate ESG elements into the developments in Malaysia include Elmina Business Park in Selangor by Sime Darby Property, i-Park@Senai Airport City in Johor by AME Development Sdn Bhd and Western Digital Batu Kawan in Penang.

Furthermore, there seems to be an emergence of a new asset class, driven by ESG coupled with the backlash of the pandemic as the inadequate and unsanitary living conditions of workers became magnified by workplace cluster outbreaks. Consequently, Knight Frank Malaysia worked closely with our clients to introduce the very first professionally managed workers’ accommodation within Klang Valley. This was accomplished by securing the largest international provider of professionally managed workers’ accommodation in Singapore & Malaysia – Centurion Westlife to manage c. 6,000 beds of Purpose-Built Workers’ Accommodation (PBWA) in partnership with the state development arm of Selangor (PKNS) within Petaling Jaya.

Moving forward, the need for socially responsible business practices will continue to grow because there are strong demand indicators for ESG and sustainability services. It is imperative that real estate companies continue to be forward-looking and implement ESG initiatives to protect their assets while driving the new generation of industrial developments, comprising master industrial developments that are efficiently planned and managed as a complete self-sustaining industrial ecosystem.

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