Opportunity Zones within ESG Portfolios

In 2019, $285 billion were poured into Environmental, Social, and Corporate Governance (ESG) funds. In 2020, this number rose to an inflow of $542 billion USD. In 2022 it jumped to $649 of additional investments into ESG funds. The massive influx of ESG placements has driven index funds, venture capital firms, and retail investors to consider the implications of human betterment as a necessity for corporate success. 

Within the real estate world, the response came earlier in 2017 with the Tax Cuts ad Jobs act allowing for a form of ESG investment, the Opportunity Zone. This is in function a tract of land designated to provide infrastructure in underserved communities allowing real estate to directly tackle the “S” portion of ESG investment. According to Former U.S.Treasury Secretary Steve Mnuchin, “I think there’s going to be over $100 billion of private capital that will be invested in opportunity zones. … This will unlock lots of capital that was tied up that never would have been sold to reinvest in these communities.”

Within the database OpportunityDB, the 311 Qualified Opportunity Funds (QOF) are attempting to raise $64 in funds to deploy within areas that require development and infrastructure. This is no small task to do so, but if fulfilled this industry will comprise almost 10% of all ESG investment placement. The nature of QOFs also heavily incentivizes the placement of capital gains to provide tax deferral benefits for those looking to be involved in ESG investments.

According to the Joint Center for Housing Studies of Harvard University (JCHS),

In 2015, 37% of households were rentals, which amounted to 43 million locations. It is stated, “…many of these homes are located within current (and future) Opportunity Zones, presenting the volume conducive to improving workforce housing that will support job growth and provide safe environments that raise people’s standard of living.”

It appears that ESG investments are not slowing down and the massive tax benefits from placing capital gains in QOFs are difficult to ignore. Ideally, we believe these incentives will lead to overall human betterment. It also seems likely that for as long as the Opportunity Zone industry exists, ESG funds will be hard-pressed to not use them for real estate exposure at the minimum.