ESG, operational efficiency and operational performance: evidence from Real Estate Investment Trusts

Abstract

Purpose

The purpose of the paper is to examine the relationship between the Environmental, Social and Governance (ESG) performance of Real Estate Investment Trusts (REITs) and their operational efficiency and performance.

Design/methodology/approach

The authors use S&P Global (formerly SNL Real Estate) for the study analyses and examine all publicly traded REITs based in the United States over the 2019–2020 sample period. The authors regress the measures of REIT operational efficiency and operational performance on REIT ESG scores while controlling for REIT characteristics and use an ordinary least squares (OLS) estimation model with heteroscedasticity-robust standard errors. The authors also run additional regressions to examine the implications of operational efficiency on the relationship between ESG and operational performance.

Findings

The authors find that REITs that perform well on the ESG scale have higher operational efficiency. In addition, the authors find that REITs with better ESG scores are associated with better operational performance. Finally, the authors find that the positive association between ESG scores and operational performance is stronger in REITs with higher operational efficiency.

Practical implications

First, the adoption of ESG adds value to the REIT in terms of increased operational performance and efficiency. Second, the value addition of ESG to an REIT is driven by the better operational efficiency of some REITs over the others. Therefore, the authors’ findings suggest that REITs that currently score poorly on ESG performance would first need to focus on all the possible avenues to improve economies of scale and hence operational efficiency. This approach would help ensure that when those REITs adopt ESG initiatives, they get the most bang for their buck.

Originality/value

To the best of the authors’ knowledge, this is the first study that relates operational efficiency and operational performance of REITs to their ESG scores.

Citation

Aroul, R.R., Sabherwal, S. and Villupuram, S.V. (2022), "ESG, operational efficiency and operational performance: evidence from Real Estate Investment Trusts", Managerial Finance, Vol. 48 No. 8, pp. 1206-1220. https://doi.org/10.1108/MF-12-2021-0593