Nonlinear Effects of Environmental, Social and Governance on Operational Efficiency and Performance of Real Estate Investment Trusts: an International Perspective

Lee, Yi Ling (2024) Nonlinear Effects of Environmental, Social and Governance on Operational Efficiency and Performance of Real Estate Investment Trusts: an International Perspective. Masters thesis, Tunku Abdul Rahman University of Management and Technology.

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Abstract

A real estate investment trust (REIT) is a corporation that owns, manages or finances real estate properties that generate income. Nowadays, investors are progressively integrating environmental, social and governance (ESG) criteria into their decision-making processes, acknowledging that sustainable practices have the potential to reduce risks and generate substantial rewards over the long-term. Therefore, the convergence of ESG standards and performance of REITs has emerged as a prominent focal point in the finance and real estate industries. Hence, this study aims to investigate the nonlinear effects of ESG as well as the individual measures of environmental, social and governance on the operational efficiency and performance of REITs. This study is conducted based on 183 listed REITs from countries or economies located in four major regions, namely Asia Pacific, Americas, South Africa and Europe for the period 2018 to 2022. In this study, the pooled ordinary least squares method has been used. According to the research findings, it is concluded that ESG has a nonlinear effect on the operational efficiency and performance of REITs. This indicates that there is a threshold level of ESG for REITs to attain an optimal operational efficiency and performance. When the ESG performance is below the threshold, the operational efficiency and performance of REITs will keep increasing and form an upward slope curve. However, when a certain threshold is reached, the curve will slope downwards, indicating that the operational efficiency and performance of REITs will start declining. This may happen as the costs of ESG initiatives outweigh their benefits. Hence, an inverted U-shaped curve or nonlinearity is observed. In terms of individual measures of environmental, social and governance, each of the ESG pillars have a nonlinear effect of the operational efficiency of REITs. However, only the environmental pillar has a nonlinear association with the operational performance of REITs. Meanwhile, social and governance have not statistically significant relationships with the operational performance of REITs. Several important implications can be drawn from this study. First, this study may provide policymakers with important guidance on the possible nonlinear relationship between ESG and operational performance and efficiency to formulate regulatory frameworks and standards. Besides, this study may assist REIT operators to understand the importance of incorporating good ESG practices in their business strategies and operations. Last but not least, this study may assist investors to formulate rational investment decisions by understanding how good ESG practices may enhance the operational efficiency and performance of REITs.