Are Green and Healthy Building Labels Counterproductive in Emerging Markets? An Examination of Office Rental Contracts in India

Financial prudence compels businesses to improve their Environmental, Social, and Governance (ESG) performance when the marginal benefits, pecuniary or non-pecuniary, exceed the marginal costs. For several firms, renting green offices is a feasible ESG activity. Analyzing over 17,000 green rental contracts in India, we find that rents in green-labeled assets and those with health certification command significant premiums between 4-21%. However, the green rents increased much faster over time compared to non-green counterparts, and the propensity to rent green varies significantly across industry segments. We further examine how the market for green offices evolved after a mandatory ESG Disclosure Requirement was enforced in India in 2021. We find that suppliers (landlords) benefited from the regulation by disproportionately increasing rental rates. Existing tenants and foreign firms ended up paying higher rental prices while most other firms, including the assumed target groups of the new policy, redirected their green commitment away from green buildings. Although the policy may yield more positive results in the longer run, a reduced propensity to rent green offices is the opposite of what the ESG Disclosure Requirement tried to achieve.