Sustainability Performance and Financial Constraints in Real Estate: Evidence from Global REITs and Real Estate Management Firms

Abstract

Buildings account for about 39% of global energy-related carbon emissions. Sustainable projects such as green retrofits are capital intensive and property firms find it difficult to secure finance for them. Sustainability reporting by property investors has expanded alongside climate policy, yet it is unclear whether sustainability performance eases or tightens access to finance for property firms. This study examines whether the sustainability performance of listed real estate firms is associated with lower financial constraints. The sample covers 505 firms from 45 countries and 4,826 firm-year observations between 2010 and 2023. It includes 275 real estate investment trusts (REITs) and 230 management and development firms. Financial constraints are measured with the Whited and Wu (WW) index. Sustainability performance is measured by a composite score and by its environmental, social and governance pillars. Fixed effects regressions with firm and year effects and standard errors clustered by firm are estimated for the full sample, for each business model and for developed and developing economies. The composite score is associated with lower financial constraints in the full sample and for both business models, with a larger coefficient for management and development firms. The association is significant in developing economies and insignificant in developed economies. Within developing economies, it is significant for management and development firms but not for REITs. The environmental and social pillars are significant in the full sample and for management and development firms. For REITs only the social pillar is significant. The governance pillar is not significant in any specification. Because real estate shapes cities through construction, operations and use of urban space, the evidence is relevant to lenders, investors and policymakers who pursue sustainable urban development in line with SDG 11 on sustainable cities and communities.

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