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MF
48,8
1206
Received 2 December 2021
Revised 14 January 2022
Accepted 25 January 2022
Managerial Finance
Vol. 48 No. 8, 2022
pp. 1206-1220
© Emerald Publishing Limited
0307-4358
DOI 10.1108/MF-12-2021-0593
ESG, operational efficiency and
operational performance:
evidence from Real Estate
Investment Trusts
Ramya Rajajagadeesan Aroul, Sanjiv Sabherwal and
Sriram V. Villupuram
Finance and Real Estate, College of Business, University of Texas,
Arlington, Texas, USA
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.
Keywords Operational performance, Social, Environmental, Operational efficiency, ESG,
Real estate investment trusts, Governance
Paper type Research paper
1. Introduction
ESG (environmental, social, governance) is one business acronym I think all CEOs should
understand and pay as much attention to as more familiar ones such as EBITDA or EPS, because I
believe that if you don’t take care of the former, then the latter ultimately will suffer too. – Neil Penhall
(CEO of SLR Consulting) [1]
The attention given to Environmental, Social and Governance (ESG) measures by
corporations and capital markets has significantly increased in recent times. In 2019, the
Business Roundtable adopted a new statement of corporate purpose signed by 181 chief
executive officers (CEOs) who committed to lead their companies for the benefit of all
stakeholders and not just shareholders [2]. The coronavirus disease 2019 (COVID-19)
pandemic and recent social events have further accelerated this trend of greater focus on
ESG. In a 2021 survey of 530 corporate executives based in the US and Europe, more than
three-quarter of the respondents said that ESG efforts have an impact on a corporation’s ESG and REIT
brand and reputation, almost half stated that ESG efforts affect a company’s financial Efficiency and
outcomes, and more than half said that they considered ESG metrics for some investments
that their company made [3].
Performance
In this paper, we examine the relationship between ESG and operational efficiency and
performance of Real Estate Investment Trusts (REITs). REITs are pass-through
intermediaries that manage a portfolio of commercial real estate properties on behalf of
their shareholders. Publicly traded REITs are an economically important asset class as they 1207
own and operate about $2.5tn in real estate assets. REITs are present in most household
savings portfolios either implicitly or explicitly. According to the National Association of
Real Estate Investment Trusts (NAREIT), 145 m people live in households invested in REITs.
This number covers a little less than half of the US population.
Because of their intermediary status, REITs are not taxed at the corporate level, and in
return, they pass on at least 90% of their earnings as dividends to their shareholders. REITs
pay dividends to their shareholders from their fund flow from operations. The dividend yield
of the FTSE NAREIT All REITs index is around 3.8% for 2020. In comparison, the S&P 500
index dividend yield is 1.5%. As a result, they regularly access the equity capital markets to
invest in new real estate opportunities or to meet new capital expenditures such as those
incurred by adopting ESG-related measures. In addition, on the debt side, REITs, just like any
other real estate asset, are highly leveraged. REITs raised $106bn in public capital markets in
2020. Therefore, it is essential for an REIT to deploy capital in its business operations such
that there is minimal impact on its operational efficiency.
As mentioned above, the real estate industry, like the banking industry, employs higher
leverage, on average, compared to the other industries. This is true, in particular, for REITs.
Higher leverage requires that the operational efficiency stays high enough to service the high
levels of debt. Otherwise, it would lead to an increase in the cost of debt or a forced decrease in
leverage. In addition, commercial real estate properties go through tenant turnovers from
time to time. Some turnovers are predictable due to the end of a lease and non-renewal by the
current tenant. Unpredictable turnovers are caused by a tenant’s default on a lease contract.
This is typically due to the failure of the tenant’s business. For an individual property, a
tenant turnover leads to a drop in operational efficiency as well as operational performance
due to lower revenues in the presence of fixed costs.
On the other hand, when a portfolio of properties, such as in an REIT, operates at a higher
efficiency, there is typically enough room for these turnovers at the property level. For
example, when there is an unexpected vacancy in one of the properties, an REIT can borrow
from the net operating income from the other properties in their portfolio. This can be pursued
until the vacant property gets steady cash flows from a new tenant and lease contract. In
addition, there are economies of scale at the REIT level since there are several properties in
the REIT portfolio maintained and operated at the same time. Higher economies of scale
imply higher operational efficiency.
Therefore, REITs are structurally in a better position financially to adopt ESG initiatives
given their economies of scale when compared to individual/smaller property owners.
Ambrose et al. (2005) discuss the economies of scale among REITs and find that REITs that
are larger as measured by market value tend to have higher economies of scale and lower
market betas. Ambrose et al. (2000) illustrate that the benefits to economies of scale vary by
REIT type. For example, multi-family/residential REITs rarely benefit from economies of
scale compared to the other REIT types.
While REITs are better positioned to adopt ESG initiatives, they also have a greater need
to embrace those initiatives. Real estate, including properties in REITs and individual/smaller
properties, is estimated to contribute to around 40% of carbon emissions globally. This is one
of the most significant shares of emissions by any one industry. Because of this, REIT
MF managers and shareholders may be concerned that ESG-focused mutual funds will not
48,8 consider REITs favorably if their ESG performance is not satisfactory. However, they may
also wonder if the adoption of ESG initiatives improves or hurts operational efficiency.
Operational efficiency has significant consequences for REITs. Beracha et al. (2019a) show
that REITs with a relatively lower operational efficiency exhibit higher market risk and lower
performance. These consequences will make new capital expensive for REITs since they
pass-through/distribute most of their free cash flow as dividends to their shareholders. This
1208 study examines whether ESG initiatives have a positive impact on operational efficiency and
performance. This study also sheds light on which REITs are bound to benefit the most from
the ESG initiatives.
Using a sample of US equity REITs from 2019 to 2020, we examine the relationship
between ESG and operational efficiency and performance. We employ three different proxies
to measure operational efficiency: asset turnover ratio and two REIT operational efficiency
measures employed by Beracha et al. (2019a). We show that the ESG score is strongly related
to both REIT operational efficiency and performance. With an increase in ESG scores, the
operational efficiency of REITs improves robustly across all measures of operational
performance. We also demonstrate that REITs with better ESG scores are associated with
better operational performance, as proxied by funds from operations (FFO). In addition, we
find that the positive relationship between ESG and REIT operational performance is
magnified in REITs with better operational efficiency. Overall, our findings illustrate not only
the importance to REITs of adopting ESG initiatives to improve their operational
performance and efficiency but also the significance of operational efficiency in enhancing
the ESG–operational performance relationship.
The contributions of this paper are threefold. First, we provide evidence of a positive
relationship between ESG and REIT operational efficiency. Second, we demonstrate the
positive relationship between ESG and the operational performance of REITs. Third, we
show that REIT operational efficiency is an important factor in evaluating the relationship
between ESG and operational performance. Specifically, we find that the positive relationship
between ESG and REIT operational performance is stronger among more operationally
efficient REITs. Our findings also complement Feng and Wu (2021) by suggesting that better
ESG disclosure can help improve different aspects of financial performance in REITs. Most
importantly, we find that those REITs that operate at higher efficiency and adopt ESG
initiatives tend to generate greater fund flow from operations. Overall, these findings
illustrate the importance and suitability of the adoption of ESG initiatives by REITs.
The rest of this paper is organized as follows. Section 2 discusses the recent literature and
offers our hypotheses. Section 3 provides detail of the data used in this study. The methods
employed and findings are discussed in Section 5. Section 5 concludes the paper.

2. Literature review and hypotheses

2.1 Literature review
Beracha et al. (2019a) did a recent examination of operational efficiency in REITs. They
examine the impact of operational efficiency of US equity REITs on operational performance,
risk and stock returns. They use return on assets (ROA) and return on equity (ROE) as
operational performance measures. They find that operationally efficient REITs generate
better operational performance, lower credit risk and lower total risk. They also show that
among the cross-section of REITs, those with higher operational efficiency outperform those
with lower efficiency in terms of cumulative stock returns. In addition, Beracha et al. (2019b)
show that a higher operational efficiency predicts higher firm value. Their measures of firm
value include market to book ratio, firm Q and the capitalization rate.
 It was stipulated in the earlier years that REITs had to hire an external investment ESG and REIT
advisory firm for choosing investments and a property management firm to manage their Efficiency and
operations. For various reasons, such as poor economies of scale, operational efficiency was
lower during those years. Since 1986, REITs have been allowed to self-manage their
Performance
properties. Nicholson and Stevens (2021) examine the operational efficiency of REITs
managed by external vs internal advisors and find that operational efficiency is generally
higher for internal/self-managed REITs. They show that the inefficiencies of externally
managed REITs arise from various fees charged by external advisory and management 1209
companies. In addition, they find that, in general, the operational efficiency of REITs has
increased after the 2008–2010 financial crisis compared to the pre-crisis period.
Operational efficiency is also of importance to other industries such as banking. Allen and
Rai (1996) examine the impact of laws in countries that prohibit the functional combination of
commercial investment banking units with banks. They find that large banks with both the
commercial and investment banking arms were the most inefficient due to the poor
economies of scale within the units. This is in comparison to countries that do not prohibit the
amalgamation of those units. Therefore, any aspect that increases the economies of scale
within a firm, whether an REIT or a bank, would increase its operational efficiency.
Anderson et al. (1998) have documented another example of diseconomies of scale and
hence lower operational efficiency in the residential real estate brokerage industry. They find
that smaller firms had lower operational efficiency relative to larger firms. They attribute this
to the fixed costs and the poor utilization of the inputs within the firm. Therefore, a clear
understanding of the external forces affecting operational efficiency is essential from a
practical and academic standpoint.
Most studies on ESG focus on an REIT’s property holdings. These studies examine the
implications of ESG, as measured by LEED and Energy Star certification, on property value
and rents (Fuerst and McAallister, 2009; Kok et al., 2011). However, the literature focused on
ESG is very limited at the REIT level. A recent study by Feng and Wu (2021) finds that REITs
with better ESG have a lower cost of debt and higher credit ratings, suggesting that an
improved ESG disclosure can help REITs gain better access to the capital markets. Our study
contributes to this thin but growing strand of literature on a very important and timely topic.

2.2 Hypotheses
ESG adoption could potentially decrease the operating cost (input) of REITs. On the other
hand, the net operating income (output) could increase after the ESG adoption. For example,
energy-intensive tenants would be willing to pay a premium for renting an energy-efficient
real estate facility. The combination of decreased input cost and increased output income
from the same portfolio of properties after adopting ESG would improve the operational
efficiency of an REIT. Accordingly, we propose our first hypothesis as follows.
H1. The operational efficiency of an REIT and its ESG performance are positively
related.
Environmentally efficient spaces can command a premium in rent compared to spaces that
are less environmentally friendly. Rent premium combined with lower operating costs would
lead to a positive impact on operational performance. Consistent with this argument, our
second hypothesis is the following.
H2. The operational performance of an REIT and its ESG performance are positively
related.
Operationally efficient REITs are those that have higher economies of scale. The higher
economies of scale could result from similar properties in their portfolio or geographically
MF closer properties. Greater economies of scale enable them to benefit more from ESG initiatives
48,8 than REITs that own a variety of properties. Therefore, REITs with higher operational
efficiency combined with better ESG initiatives can maintain higher fund flow from
operations than those adopting ESG but operating at relatively lower economies of scale.
Accordingly, we propose our first hypothesis as follows.
H3. The positive association between an REIT’s operational performance and ESG
1210 performance is stronger for more operationally efficient REITs.

3. Data
We use S&P Global (formerly SNL Real Estate) for our analyses. We examine all publicly
traded REITs based in the United States over the 2019–2020 sample period. We restrict our
data to this relatively short time frame because ESG rating data are available only for this
period. ESG scores are generally updated at an annual frequency, except under certain
specific circumstances. For our sample, all the REITs only had a yearly update. From S&P
Global, we collect REIT ESG ratings for 2019–2020 at an annual frequency and several
corresponding firm characteristics at a quarterly frequency.
ESG scores range from 0 to 100, with zero indicating the worst ESG performance
and 100 representing the best performance. All our dependent variables, including
operational efficiency and operational performance measures, are available at a
quarterly frequency. Except for the ESG scores, our independent variables of interest
are also available at a quarterly frequency. Therefore, we conduct our analyses at the
quarterly frequency. Our final sample consists of 114 REITs in 2019 and 127 REITs in
2020. The sample includes 1,040 REIT-quarter observations spanning the period
2019–2020.
Each observation includes total assets, total revenue, total expenses, real estate
depreciation and amortization, rental operating expense, FFO, the year the REIT was
established, REIT type (residential, industrial, office, hotel, etc.) and REIT’s self-managed
status. We then compute measures of operational efficiency. Our first measure of operational
efficiency is the asset turnover ratio (AT), which is calculated as the ratio of total assets to
total revenues.
Total assets
AT ¼ (1)
Total revenues
We also use two more measures of operational efficiency following Beracha et al. (2019a).
Their measure is similar to Bers and Springer (1998a, b) that use the ratio of different REIT
expenses (general and administrative expenses, management fees, operating expenses and
interest expense) to total liabilities to study economies of scale for REITs. The first
operational efficiency measure of Beracha et al. is without rental expenses. It is computed by
subtracting real estate depreciation and amortization expense from total expenses and
dividing the difference by revenue. Their second measure considers rental expenses and is
obtained by subtracting real estate depreciation and amortization expense and real estate
operating expenses from total expenses and then scaling the difference by total revenue. Prior
literature has posited that these measures could be a proxy for agency costs because they
measure the effectiveness of management in controlling operations and direct agency costs
(Ang et al., 2000). The REIT operational efficiency ratio (OER) is computed in two different
ways as follows:
Total expenses  Real estate depreciation and amortization
OER1 ¼
Total revenue


Total expenses  Real estate depreciation and amortization
 Rental operating expenses
ESG and REIT
OER2 ¼ Efficiency and
Total revenue
Performance
Beracha et al. (2019a) argue that the above two variations better reflect the cash flow-related
expenses that REITs could control and manage by accounting for real estate depreciation and
amortization and rental operating expense reimbursements. They also adjust for property-type
level operational efficiency differences for REITs. They account for this by dividing each REIT’s 1211
OER measures by the mean of the OER of all REITs that specialize in the same real estate property
type in that year. We call this property-type adjusted OER as relative OER. The two measures are
as follows for REIT i in property-type j, with n being the number of REITs in that property type:
OER1i;j
Relative OER1i;j ¼ 8 X n 9
< OER1i;j =
: i¼1 ;
nj
OER2i;j
Relative OER2i;j ¼ 8 n 9
X
< OER2 = i;j
: i¼1 ;
nj

These measures are operating expense ratios, and therefore, the higher (lower) the efficiency
ratio, the less (more) efficient the REIT. We define our operational efficiency measures as the
relative OER measures subtracted from one to be more intuitive. Our resulting measures OE1
and OE2 are efficiency ratios, and the higher (lower) the efficiency ratio, the more (less)
efficient the REIT is.
OE1 ¼ 1  Relative OER1 (2)
OE2 ¼ 1  Relative OER2 (3)

To evaluate REIT operational performance, we use FFO. Our control variables include size,
measured as the natural logarithm of total assets; age, measured as the difference between the
sample year and the year that an REIT was incorporated; self-managed, an indicator variable
that takes a value of one if an REIT is self-managed and zero otherwise; triple net, an indicator
variable that takes a value of one if the REIT provides triple net leases and a value of zero
otherwise. We also include six indicator variables for property types–residential, retail, hotel,
office, healthcare and industrial–that take a value of one if an REIT belongs to that specific
property type and zero otherwise. Appendix describes the dependent, independent and
control variables. Table 1 presents the descriptive statistics of the ESG scores and other
variables employed in the study.
The average observed REIT ESG score is 16.44 across the sample period, with a minimum
value of three and a maximum score of 80. The average size of a sample publicly traded REIT
is around $5.5bn. The average age of our sample REITs is about 19.5 years during our
observation period. We also see that the average asset turnover ratio is about 3.58. On
average, the two operational efficiency measures are 0.60 and 0.47, respectively. About 81%
of the sample includes self-managed REITs, and about 28% are triple net REITs. The sample
includes 13% residential, 14% retail, 9% hotel, 14% office, 12% healthcare and 10%
industrial REITs. The remaining sample comprises of diversified/hybrid REITs that are used
as the base for our analyses.
MF Variables Observations Mean Std. Dev Minimum Maximum
48,8
ESG 1,020 16.44 17.94 3.00 80.00
Size 964 8.61 0.94 5.90 10.93
Triple net 964 0.28 0.45 0.00 1.00
Age 964 19.48 12.45 3.00 61.00
Self-managed 964 0.81 0.39 0.00 1.00
1212 Residential 964 0.13 0.34 0.00 1.00
Retail 964 0.14 0.35 0.00 1.00
Hotel 964 0.09 0.28 0.00 1.00
Office 964 0.14 0.35 0.00 1.00
Healthcare 964 0.12 0.32 0.00 1.00
Industrial 964 0.10 0.29 0.00 1.00
AT 963 3.58 2.06 0.15 15.23
OE1 684 0.60 1.40 2.97 3.92
OE2 684 0.47 0.94 2.99 3.74
Table 1. FFO 780 6.98 2.13 0.00 13.50
Summary statistics Note(s): This table provides the summary statistics of the dependent and independent variables

4. Methodology and findings

4.1 ESG and operational efficiency
To begin our analyses, we first evaluate whether an REIT’s operational efficiency is
positively associated with its ESG policies as measured by its ESG score. Specifically, we
regress our measures of REIT operational efficiency on its ESG scores while controlling for
REIT characteristics. We use an ordinary least squares (OLS) estimation model with
heteroscedasticity-robust standard errors as per the regression specification (4) [4].
Operating Efficiencyi;t ¼ β0 þ β1 ESGi;t þ β2 Sizei;t þ β3 Agei;t þ β4 Self managedi;t
þ β5 Property Typei;t þ β6 Triple Neti;t þ εi;t (4)

In the above specification, Operational Efficiencyi,t, is the operational efficiency of REIT i in

year t, as computed using three different measures [5]. The first measure is the asset turnover
ratio from Eqn (1), and the other two measures are computed using the efficiency ratios used
by Beracha et al. (2019a) with a slight variation, as shown in Eqs (2) and (3). The other
variables included in the above specification are as defined earlier in the text, with details also
included in Appendix.
The estimates of specification (4) for the first measure of operational efficiency, asset
turnover ratio (AT), are reported in Table 2. The results provide evidence that REITs with
higher ESG scores are associated with better operationally efficient REITs, on average,
even after controlling for size, age, management structure and property type. In all three
models included in the table, the coefficient of ESG score is positive and significant at the
1% level (p-values of 0.0122, 0.0010 and 0.0116, respectively). The results are consistent
across different model specifications using a combination of several control variables.
These results suggest that REITs with better (poor) ESG policies are more (less)
operationally efficient.
Table 3 presents the results for the remaining two operational efficiency measures, OE1
and OE2. As shown in Eqs (2) and (3), these measures are relative operational efficiency
measures for each REIT with respect to its property sector average operational efficiency. We
find that REITs with higher ESG scores are related to higher operational efficiency measures.
This indicates that the higher the REIT’s inclination towards ESG policies, the higher is its
operational efficiency. The results are consistent across both the measures and similar to the
 (1) (2) (3)
ESG and REIT
Variables AT AT AT Efficiency and
Performance
ESG 0.0122*** (2.63) 0.0010* (1.75) 0.0116** (2.16)
Size 0.1158 (1.61) 0.1206* (1.73)
Triple net 1.2137*** (8.48) 1.1515*** (8.43)
Age 0.0183*** (3.90) 0.0030 (0.71)
Self-managed 0.0694 (0.31) 0.7168*** (3.51) 1213
Residential 1.2174*** (6.47)
Retail 1.4057*** (8.59)
Hotel 1.0606** (2.55)
Office 1.7443*** (9.61)
Healthcare 1.0184*** (5.98)
Industrial 0.4610 (1.49)
Intercept 3.3749*** (37.14) 5.0927*** (8.23) 4.8439*** (7.99)
Observations 963 907 907
Adjusted R-squared 0.01 0.09 0.22
Note(s): This table assesses the impact of ESG on REIT operational efficiency as measured by asset turnover
ratio (AT) while controlling for several key variables. The table includes results from three regression
specifications. The first specification includes only ESG, while the other two include a combination of control
variables. All variables are included at a quarterly frequency. The regressions are for 2019 and 2020. Variable
descriptions are provided in Appendix. t-statistics computed using robust standard errors based on the Huber– Table 2.
White Sandwich estimator are included below the coefficient estimates in parentheses. 1, 5 and 10% statistical Effect of ESG on asset
significance are indicated with ***, ** and *, respectively turnover

(1) (2)
Variables OE1 OE2

ESG 0.0095** (2.35) 0.0072*** (2.72)

Size 0.0502 (0.63) 0.0273 (0.60)
Triple net 0.2204* (1.69) 0.2639*** (2.69)
Age 0.0015 (0.37) 0.0103*** (3.44)
Self-managed 0.0728 (0.54) 0.1051 (0.96)
Residential 0.1484 (0.28) 0.1298 (0.94)
Retail 0.8955*** (3.91) 0.1882* (1.84)
Hotel 0.2294 (1.33) 0.1446 (0.92)
Office 1.0043*** (7.02) 0.6225*** (5.40)
Healthcare 0.8864*** (4.79) 0.1655* (1.79)
Industrial 0.3616** (2.47) 0.3270** (2.01)
Intercept 1.2244* (1.80) 0.5645 (1.47)
Observations 644 644
Adjusted R-squared 0.09 0.08
Note(s): This table assesses the impact of ESG on REIT operational efficiency as measured by two operational
efficiency measures (OE1 and OE2) while controlling for several key variables. The table includes results from
two regression specifications. The first specification includes the first measure (OE1), while the second
regression includes the second measure (OE2). Both the regression specifications include all control variables.
All variables are included at a quarterly frequency. The regressions are for 2019 and 2020. Variable
descriptions are provided in Appendix. t-statistics computed using robust standard errors based on the Huber– Table 3.
White Sandwich estimator are included below the coefficient estimates in parentheses. 1, 5 and 10% statistical Effect of ESG on
significance are indicated with ***, ** and *, respectively operational efficiency

results in Table 2, with asset turnover as a proxy for operational efficiency. In models (1) and
(2) of Table 3, the coefficients of ESG variables regressed against OE1 and OE2 are positive
with statistical significance at the 1% level (p-values of 0.0095 and 0.0072, respectively) after
MF controlling for REIT characteristics as well as their property type. These results suggest that
48,8 REITs with higher ESG scores are also operationally more efficient.

4.2 ESG and operational performance

Next, we examine whether an REIT’s operational performance is associated with its ESG
policies as measured by its ESG score. We use FFO scaled by total assets, to measure
1214 operational performance. We regress FFO on REIT ESG scores while controlling for REITs
characteristics. We use the ordinary least squares estimation model with heteroscedasticity-
robust standard errors as per the regression specification (5).
FFOi;t ¼ β0 þ β1 ESGi;t þ β2 Sizei;t þ β3 Agei;t þ β4 Self managedi;t þ β5 Property Typei;t
þ β6 Triple Neti;t þ εi;t (5)

In the above specification, FFOi;t is the operational performance of REIT i in year t. The
results for different regression specifications of the above are presented in Table 4. The
coefficients of ESG suggest a positive relationship between REIT ESG policies and
operational performance. In all three models, the coefficient of ESG score is positive and
significant at the 1% level (p-values of 0.0006, 0.0003 and 0.0004, respectively). These results
provide evidence that on average, REITs with higher ESG scores are associated with better
REIT operational performance. The results hold after controlling for size, age, management
structure and property type. Therefore, the evidence suggests that REITs with better (poor)
ESG policies have higher (lower) operational performance.
To examine the relationship between ESG and FFO further, we separate the sample into
quantiles of FFO. This is to investigate if the positive relationship between ESG and FFO is
concentrated in one portion of the FFO distribution. Table 5 details the quantile regression
results. We observe that the coefficient of ESG increases with FFO, which is at least

(1) (2) (3)

Variables FFO FFO FFO

ESG 0.0006*** (12.77) 0.0003*** (7.00) 0.0004*** (7.48)

Size 0.0304*** (15.21) 0.0310*** (15.44)
Triple net 0.0013 (0.70) 0.0040** (2.01)
Age 0.0002*** (2.67) 0.0002** (2.18)
Self-managed 0.0061** (2.36) 0.0030 (0.84)
Residential 0.0121*** (3.56)
Retail 0.0009 (0.44)
Hotel 0.0033 (0.88)
Office 0.0072*** (3.98)
Healthcare 0.0052* (1.68)
Industrial 0.0035 (1.21)
Intercept 0.0322*** (18.66) 0.2773*** (14.86) 0.2812*** (15.44)
Observations 748 748 748
Adjusted R-squared 0.10 0.63 0.66
Note(s): This table assesses the impact of ESG on FFO computed as FFO payout scaled by total assets while
controlling for several key variables. The table includes results from two regression specifications. The first
specification includes ESG with a few of the control variables, while the second specification includes all the
Table 4. control variables. All variables are included at a quarterly frequency. The regressions are for 2019 and 2020.
Effect of ESG on Variable descriptions are provided in Appendix. t-statistics computed using robust standard errors based on
operational the Huber–White Sandwich estimator are included below the coefficient estimates in parentheses. 1, 5 and 10%
performance statistical significance are indicated with ***, ** and *, respectively
 FFO
ESG and REIT
Variables 20th quantile 40th quantile 60th quantile 80th quantile Efficiency and
Performance
ESG 0.0001*** (3.23) 0.0002*** (7.14) 0.0002*** (7.51) 0.0003*** (3.32)
Size 0.0136*** (33.35) 0.0169*** (40.31) 0.0199*** (34.67) 0.0237*** (13.09)
Triple net 0.0030*** (3.83) 0.0048*** (6.05) 0.0067*** (6.21) 0.0036 (1.06)
Age 0.0001** (2.54) 0.0000 (0.21) 0.0000 (0.74) 0.0000 (0.24)
Self- 0.0030*** (2.86) 0.0024** (2.18) 0.0028* (1.88) 0.0047 (1.01) 1215
managed
Residential 0.0014 (1.35) 0.0007 (0.67) 0.0036** (2.49) 0.0049 (1.03)
Retail 0.0022** (2.18) 0.0041*** (4.02) 0.0046*** (3.25) 0.0004 (0.10)
Hotel 0.0002 (0.11) 0.0031 (1.64) 0.0034 (1.29) 0.0009 (0.11)
Office 0.0061*** (5.98) 0.0088*** (8.33) 0.0086*** (5.93) 0.0082* (1.80)
Healthcare 0.0006 (0.58) 0.0009 (0.86) 0.0017 (1.16) 0.0016 (0.36)
Industrial 0.0017 (1.48) 0.0036*** (3.00) 0.0040** (2.45) 0.0068 (1.32)
Intercept 0.1255*** (37.78) 0.1577*** (46.18) 0.1846*** (39.36) 0.2222*** (15.03)
Observations 748 748 748 748
Pseudo R- 0.4014 0.4483 0.4822 0.4888
squared
Note(s): This table assesses the impact of ESG on FFO computed as FFO payout scaled by total assets while
controlling for several key variables using quantile regressions. The table includes results from four regression
specifications that include ESG with all the control variables for the 20th, 40th, 60th, and 80th quantiles of FFO,
respectively. All variables are included at a quarterly frequency. The regressions are for 2019 and 2020. Table 5.
Variable descriptions are provided in Appendix. t-statistics computed using robust standard errors based on Effect of ESG on
the Huber–White Sandwich estimator are included below the coefficient estimates in parentheses. 1, 5 and 10% operational
statistical significance are indicated with ***, ** and *, respectively. F-tests reveal statistically significant performance using
differences at a 1% confidence level in ESG coefficients across varying operational performance quantile regressions

suggestive of a performance effect. Firms with better operational performance seem to be

impacted more positively by ESG policies than those not performing as well. The coefficients
of ESG are significant at the lower levels of FFO but are of lower magnitudes and are found to
be monotonically increasing with increasing levels of FFO. The coefficient of ESG is positive
and significant at the 1% level in all the model specifications (p-values of 0.0001, 0.0002,
0.0002 and 0.0003 for the 20th, 40th, 60th and 80% FFO quintiles, respectively). We also find
that ESG coefficients increase from 0.0001 to more than triple to 0.0003 when FFO increases
from the 20th quintile to the 80th quintile. We test the statistical difference between 20th,
40th, 60th and 80th quantiles using a Wald test (F-value of 3.97 and a p-value of 0.001) and
find that they are statistically significantly different at the 1% level.

4.3 ESG, operational efficiency and operational performance

This section examines the implications of operational efficiency on the relationship between
ESG and operational performance. Specifically, we analyze whether the effect of ESG on
operational performance is different for REITs with higher operational efficiency than the
ones with lower efficiency. While previous studies have examined the relationship between
operational efficiency and operational performance, we examine whether operational
efficiency affects the relationship between ESG and operational performance. We conduct
this examination for each of the three measures of operational efficiency used in this study.
We first classify REITs into “Low,” “Medium” and “High” asset turnover groups if the
REIT’s asset turnover ratio is in the first, second or the third tercile of asset turnover (AT),
respectively. Table 6 presents the results of FFO regressed on ESG in Low, Medium, and High
Asset Turnover groups of REITs. We use regression specification (5) for three subsamples of
“Low,” “Medium” and “High” asset turnover REITs. Table 6 includes the results for these
MF Asset Turnover
48,8 Variables Low Medium High

ESG 0.0004*** (5.08) 0.0005*** (5.56) 0.0006*** (4.43)

Size 0.0363*** (10.67) 0.0332*** (12.10) 0.0194*** (8.05)
Triple net 0.0092*** (3.09) 0.0035 (0.86) 0.0073* (1.83)
Age 0.0002** (2.27) 0.0002 (1.51) 0.0003*** (3.83)
1216 Self-managed 0.0102** (2.48) 0.0115** (2.30) 0.0102** (2.10)
Residential 0.0658*** (4.13) 0.0018 (0.64) 0.0020 (0.49)
Retail 0.0049 (1.60) 0.0079** (2.13) 0.0040 (1.27)
Hotel 0.0154*** (2.75) 0.0101 (1.58) 0.0124*** (2.65)
Office 0.0079** (2.34) 0.0058 (1.62) 0.0115*** (6.50)
Healthcare 0.0040 (1.16) 0.0026 (0.55) 0.0093** (2.40)
Industrial 0.0092* (1.74) 0.0104*** (3.09) 0.0024 (0.54)
Intercept 0.3224*** (11.48) 0.2973*** (13.33) 0.1835*** (9.16)
Observations 240 304 204
Adjusted R-squared 0.77 0.73 0.67
Note(s): This table assesses the impact of ESG on FFO computed as FFO payout scaled by total assets while
controlling for several key variables across varying levels of asset turnover. The table includes results from
three regression specifications that include ESG with all the control variables across terciles of asset turnover,
low, medium and high, respectively. All variables are included at a quarterly frequency. The regressions are for
Table 6. 2019 and 2020. Variable descriptions are provided in Appendix. t-statistics computed using robust standard
Effect of ESG on errors based on the Huber–White Sandwich estimator are included below the coefficient estimates in
operational parentheses. 1, 5 and 10% statistical significance are indicated with ***, ** and *, respectively. χ 2 test from
performance across seemingly unrelated regression reveals statistically significant differences at 1% confidence level in ESG
asset turnover terciles coefficients across high and low operational efficiency measured by asset turnover

three subsamples. The first column of the table contains only low AT REITs, the second
column contains only medium AT REITs and the third column includes only high AT REITs.
We find that the coefficient of ESG is positive and statistically significant in all three
subsamples, suggesting that higher ESG scores positively affect operational performance of
REITs with different levels of operational efficiency, as measured by asset turnover.
However, we find that the coefficient of ESG is 0.0004 in REITs with low AT, 0.0005 in REITs
in the medium AT tercile, and 0.0006 in REITs with high AT. Thus, the coefficient of ESG
increases as AT increases, indicating an increase (decrease) in the impact of ESG on
operational performance with an increase (decrease) in operational efficiency. In addition, we
compare the differences in the regression coefficients of ESG between the low and high AT
groups using the seemingly unrelated regression method. We find that the χ 2 value is 6.64,
which is significant at the 1% level.
Next, we classify an REIT into a “Low,” “Medium” and “High” operational efficiency
group based on whether the REIT’s operational efficiency measure lies in the first, second or
third tercile of the respective operational efficiency measure (OE1 and OE2), respectively.
Tables 7 and 8 present the results of analyses of the impact of ESG on operational
performance in REITs with Low, Medium and High operational efficiency, as measured using
two operational efficiency measures computed using Eqs (2) and (3), respectively. In both the
tables, we find that the coefficient of ESG is positive and significant at the 1% level for all
three terciles of REITs, with the relationship stronger in REITs with better operational
efficiency. In Table 7, the coefficient of ESG for REITs with low, medium and high operational
efficiency is 0.0003, 0.0004 and 0.0005, respectively. Similarly, in Table 8, the coefficient of
ESG for REITs with low, medium and high operational efficiency is 0.0002, 0.0004 and 0.0006,
respectively. In sum, in both these tables, we find that (1) the positive relationship between
ESG and operational performance holds for all REITs, and (2) the relationship gets stronger
 Operational efficiency
ESG and REIT
Variables Low Medium High Efficiency and
Performance
ESG 0.0003*** (3.17) 0.0004*** (4.57) 0.0005*** (7.41)
Size 0.0364*** (8.42) 0.0295*** (8.69) 0.0264*** (14.49)
Triple net 0.0005 (0.12) 0.0121*** (4.51) 0.0076*** (3.62)
Age 0.0004** (2.49) 0.0000 (0.06) 0.0001* (1.77)
Self-managed 0.0049 (0.53) 0.0039 (0.91) 0.0090*** (3.76) 1217
Residential 0.0086 (0.65) 0.0160*** (7.35)
Retail 0.0048 (0.63) 0.0019 (0.35) 0.0003 (0.11)
Hotel 0.0080 (0.62) 0.0020 (0.54) 0.0147*** (4.01)
Office 0.0073 (0.99) 0.0099*** (3.09) 0.0068*** (3.33)
Healthcare 0.0134* (1.68) 0.0066** (2.04) 0.0047** (2.15)
Industrial 0.0034 (0.27) 0.0092** (2.29) 0.0119** (2.51)
Intercept 0.3288*** (7.49) 0.2644*** (9.45) 0.2303*** (14.53)
Observations 156 223 129
Adjusted R-squared 0.79 0.69 0.87
Note(s): This table assesses the impact of ESG on FFO computed as FFO payout scaled by total assets while
controlling for several key variables across varying levels of operational efficiency, OE1. The table includes
results from three regression specifications that include ESG with all the control variables across terciles of
OE1, low, medium and high, respectively. All variables are included at a quarterly frequency. The regressions Table 7.
are for 2019 and 2020. Variable descriptions are provided in Appendix. t-statistics computed using robust Effect of ESG on
standard errors based on the Huber–White Sandwich estimator are included below the coefficient estimates in operational
parentheses. 1, 5 and 10% statistical significance are indicated with ***, ** and *, respectively. χ 2 test from performance across
seemingly unrelated regression reveals statistically significant differences at 1% confidence level in ESG operational efficiency
coefficients across high and low operational efficiency measured by OE1 (OE1) terciles

Operational efficiency
Variables Low Medium High

ESG 0.0002*** (5.78) 0.0004*** (2.95) 0.0006*** (5.43)

Size 0.0285*** (12.09) 0.0326*** (9.80) 0.0318*** (10.42)
Triple net 0.00278* (1.92) 0.0036 (1.01) 0.0172*** (5.31)
Age 0.0001 (1.27) 0.0005*** (3.62) 0.0004*** (2.84)
Self-managed 0.0148*** (4.75) 0.0048 (0.75) 0.0007 (0.18)
Retail 0.0030 (1.11) 0.0027 (0.81) 0.0138*** (4.15)
Hotel 0.0183*** (3.30) 0.0124** (2.05) 0.0042 (0.72)
Office 0.0050** (2.25) 0.0072* (1.77) 0.0011 (0.32)
Healthcare 0.0066* (1.66) 0.0076** (2.44) 0.0220*** (4.45)
Industrial 0.0081** (1.98) 0.0088 (1.17) 0.0203*** (5.08)
Residential 0.00277 (0.21) 0.01157*** (4.46)
Intercept 0.2468*** (12.86) 0.3050*** (9.50) 0.2783*** (12.53)
Observations 157 204 147
Adjusted R-squared 0.83 0.73 0.83
Note(s): This table assesses the impact of ESG on FFO computed as FFO payout scaled by total assets while
controlling for several key variables across varying levels of operational efficiency, OE2. The table includes
results from three regression specifications that include ESG with all the control variables across terciles of
OE2, low, medium and high, respectively. All variables are included at a quarterly frequency. The regressions Table 8.
are for 2019 and 2020. Variable descriptions are provided in Appendix. t-statistics computed using robust Effect of ESG on
standard errors based on the Huber–White Sandwich estimator are included below the coefficient estimates in operational
parentheses. 1, 5 and 10% statistical significance are indicated with ***, ** and *, respectively. χ 2 test from performance across
seemingly unrelated regression reveals statistically significant differences at 1% confidence level in ESG operational efficiency
coefficients across high and low operational efficiency measured by OE2 (OE2) terciles
MF with increasing levels of operational efficiency. We also find the differences in the regression
48,8 coefficients of ESG between the low and high OE1 (OE2) groups using the seemingly
unrelated regression method which are statistically significant at the 1% level with a χ 2 value
of 5.06 (5.54).
Previously, the results in Table 5 suggested that REITs with better operational
performance are impacted more positively by ESG policies. The results in Tables 6–8 add to
those results by showing that REITs with better operational efficiency are impacted more
1218 positively by ESG policies. These findings add to the previous literature on operational
efficiency and operational performance.

5. Conclusions
ESG factors are particularly important for REITs because of the nature of the real estate
business, increased risks from climate changes, and the growing demand for sustainability
and social responsibility from REIT stakeholders. The existing literature on REITs is
relatively thin regarding examining the impact of integrating ESG factors into financial
decisions. In this study, we attempt to contribute to this growing and important strand of
literature by examining the impact of ESG on REITs’ operations.
Specifically, we examine the impact of ESG performance of US-based equity REITs on
various operational efficiency and operational performance metrics commonly used for the
REIT industry. We find that REITs that have better ESG performance operate more
efficiently. They have better operational performance as well. In addition, we find that the
positive association between ESG performance and operational performance is stronger in
REITs with relatively higher operational efficiency. Thus, more operationally efficient REITs
benefit more from ESG initiatives than the less efficient ones.
The findings of this study have implications for the adoption of ESG initiatives by current and
future REITs. 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, our 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.
In this study, we focus on the composite ESG score. However, examining each dimension
of the ESG score (E, S and G) separately could provide additional insights. For example,
Packin and Nippani (2022) advocate a new Social Policy Rating System for commercial banks
that will measure how socially responsible commercial banks are. Future studies could
examine the individual impacts of ESG factors on REIT’s operations.

Notes
1. “A CEO’s perspective on ESG,” available at: https://www.slrconsulting.com/en/news-and-insights/
insights/ceos-perspective-esg (accessed January 2, 2022.)
2. “Business Roundtable Redefines the Purpose of a Corporation to Promote An Economy That Serves
All Americans,” available at: https://www.businessroundtable.org/business-roundtable-redefines-
the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans (accessed January
2, 2022.)
3. “Most executives think their ESG programs fall short, survey finds,” available at: https://www.
reuters.com/business/sustainable-business/most-executives-think-their-esg-programs-fall-short-
survey-finds-2021-09-15/ (accessed January 2, 2022.)
4. We perform our analyses using both pooled and panel regressions. For panel regressions, we
examine both fixed and random effects. We find consistent results across these alternative
 regression specifications. Because we have an unbalanced panel and our sample period is short, we ESG and REIT
report results for pooled regressions. Results for panel regressions are available upon request from
the authors. Efficiency and
5. We report results for regressions using contemporaneous values of ESG because ESG data are
Performance
available for only two years and using one-year lagged data would reduce our sample by half.
However, we confirm that our main results hold using lagged values of ESG. We also check for
reverse causality and find that Operational Efficiency does not determine ESG. Results for
lagged values of ESG and reverse causality analysis are available upon request from the 1219
authors.

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MF Appendix
Variable descriptions
48,8
Variable Description

ESG The ESG database of S&P Global includes an overall ESG score and individual ESG scores.
These scores are computed by S&P Global using their proprietary corporate sustainability
1220 assessment (CSA) process. ESG is the composite ESG score
AT This variable is asset turnover computed as total assets over total revenues
OE1 This variable is a measure of operational performance. First, we compute an REIT’s operating
expense ratio (OER1) by subtracting real estate depreciation and amortization expense from
the total expense and then dividing by total revenue. Then we divide the REIT’s operating
expense ratio (OER1) by the mean of the operating expense ratios (OER1) of all REITs
specializing in the same real estate property type in that year to get the relative OER1. After
that, we compute OE1 5 1 – Relative OER1
OE2 This variable is a measure of operational performance. First, we compute an REIT’s operating
expense ratio (OER2) by subtracting real estate depreciation and amortization expense and
rental operating expense from the total expense and then dividing by total revenue. Then we
divide the REIT’s operating expense ratio (OER2) by the mean of the operating expense ratios
(OER2) of all REITs specializing in the same real estate property type in that year to get the
relative OER2. After that, we compute OE2 5 1 – Relative OER2
Size Natural log of total assets
FFO This variable measures operational performance computed as FFO payout scaled by total
assets
Age This variable is computed as the number of years since an REIT’s incorporation until the year
of observation
Triple Net This indicator variable takes a value of 1 if an REIT has triple net leases and 0 otherwise
Self-Managed This indicator variable takes a value of 1 if an REIT is self-managed and 0 otherwise
Property These are six indicator variables–residential, retail, hotel, office, healthcare and industrial–
Type that take a value of 1 if an REIT belongs to that specific property type and 0 otherwise

Corresponding author
Sanjiv Sabherwal can be contacted at: sabherwal@uta.edu

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