Analysis of the Dynamic Interrelationship Between Sustainable Investment and Real Estate Firm Performance

Sustainability is increasingly gaining importance across the globe among investors, regulators, banks, governments, and various other stakeholders. The impact of different elements of sustainability such as corporate governance have also been studied extensively. Ametefe et al. (2023) identified two major strands of literature which consider the benefits of incorporating sustainable investment considerations in the investment decision of real estate firms. One strand looks at how sustainable investment practices impact the operating cost and profitability of real estate firms while a second strand looks at how ESG factors impact market fundamentals such as stock prices, return on asset, return on equity etc. Many of these studies however take a view that there is a uni-directional relationship between sustainable investment and real estate firm performance. The objective of this study is however to analyse the dynamic interrelationship between sustainable investment and the performance of real estate firms. The present study employs the ESG framework which evaluates a firm’s sustainable investment practices using the three pillars of environmental, social and governance sustainability. We make use of the Dumitrescu and Hurlin (2012) approach to testing Granger Causality which can be applied to a panel dataset. This test helps to determine if there is any, uni-directional or bi- directional relationship between real estate firm performance and the different elements of sustainability. The main focus of this paper is on listed real estate firms in South Africa, both REITs and non-REITs. The real estate market in market in developing countries have not been adequately represented in studies on this topic. For completeness however, we will include all firms listed on the JSE for which Bloomberg provides ESG data. Our analysis would be carried out on the overall ESG scores as well as specific ESG pillars i.e., Environmental, Social and Governance sustainability indicators. To determine how ESG scores vary between REITs and non-REITs, and also among the different industries and sectors, we will employ two tests, the Kruskal and Wallis (1952) test for K-independent samples and the Cuzick and Edwards (1990) test. These tests have been widely used to assess possible differences across independent samples (Wasiuzzaman et al., 2022).