ESG reporting for Real Estate

By Joyce S. Lee, FAIA, LEED Fellow, November 28th, 2018

Fall marks the season when GRESB Sustainable Real Assets releases the results from its April Assessments.  GRESB’s mission is to enhance and protect shareholder value by assessing and empowering sustainability practices of its participating investment funds.  In its 9th year of reporting, the total value of covered real estate is $ 3.5 trillion in 64 countries covered by 903 fund entities.

“Participation in GRESB has grown again in 2018 as investors seek standardized and validated ESG (for Environmental, Social, Governance) data to assess the sustainability of their real estate assets,” says Sander Paul van Tongeren, Co-Founder and Managing Director at GRESBAs a voluntary program, GRESB’s real estate assets under North American funds is still the largest in dollar value while the participation % rate of European funds is the highest.  Two Asian contingents, Japan and Hong Kong SAR, have the most significant growth in new participation in the past year.

Peter Drucker, management consultant and author, had once said.  “If you can’t measure it, you can’t improve it.” Improvement has been solid since GRESB’s inception in 2010 when only 198 (vs. 908 today) fund entities responded to the initial survey.  This year, the GRESB results events have spanned across five continents covering cities such as London, Milan, Sydney, Tokyo, San Francisco and New York. Since 2017, GRESB real estate global average score has improved from 63/100 to 68/100.  This increase within a 12-month period represents both healthy competition among participants and confidence in market ready technology solutions.  Most tellingly, the initial average GRESB score nine years ago was merely 37/100, a far cry from 68/100 today.

2016 was the first year GRESB introduced a Module on Health and Well-being. This supplemental module has since matured, and the health topic will see eventual integration in the real estate assessment to be completed by over 900 fund entities.  2018 marks the first time the Resilience Module has been introduced to GRESB participants.

Resilience is the ability of an organization or asset to survive and thrive in the face of shocks and stressors. Shocks are commonly understood to be time-limited, acute events, such as fires, floods, or earthquakes. Stressors are long-term, chronic conditions, including sea level rise, community unrest, or neighborhood inequality. Shocks and stressors can individually or cumulatively create risks for investors.

As illiquid, immovable investments, real estate assets are susceptible to changing conditions intrinsically linked to their location and surrounding communities. Those entities that future proof their assets are inevitably better prepared for shocks and stressors.  Their ability to “bounce forward” is also well calibrated because of early multi-faceted evaluations.

Recent disruptive events in the media spotlight hurricanes and typhoons in Japan, China, Philippines, the Caribbean and Puerto Rico. They also include the wildfires of California, earthquake in Indonesia, as well as the heat wave in Europe. These short–term shocks can increase vulnerability, with bottom-line impacts recognized by institutional investors. For example, immediately after major hurricanes in Texas and Florida last year, Prologis (PLDGP:OTQGB) was in the media communicating that there was no significant damage to their portfolio.

The GRESB Resilience Module is developed as a response to 1) meet growing investor demand for information on resilience; and 2) increase access to information about strategies used by companies to assess and manage risks from social and environmental shocks and stressors, including the impact of climate change. The creation of the resilient module also coincided with the release of an international guidance from the Financial Stability Board’s Task Force for Climate-related Financial Disclosure (TCFD). The TCFD recommended disclosure of information related to governance, risk management, strategy, and performance metrics. (Fig 1). “TCFD recommendations are driving a sea change in investor expectations. Leading property companies must be able to understand and report on climate-risk and resilience,” says Dan Winters, Head of Americas GRESB. 

TCFD                                                                                                                                Credit: TFCD 2017

The Resilience Module includes eight broad indicators related to corporate governance, risk management, business strategy, and performance measurement. Those completing this GRESB supplemental module will 1) respond to investor attention on resilience 2) differentiate companies in a competitive fundraising environment 3) access business intelligence on best practices among companies and funds 4) improve ability to identify a set of risks and opportunities for value creation. Below is a sampling of questions in the new module:

  • Does the organization actively identify and engage stakeholders potentially impacted by social and environmental shocks and stressors?
  • Does the organization periodically assess the vulnerability of its assets to social and environmental shocks and stressors?
  • Has the organization established objectives and implemented strategies to promote resilience?
  • Did the organization take specific actions to promote resilience during the reporting period?

The answers are set up to include nuances from entities to create the basis of a score, knowing that the maturation process could well take all three years to have the Resilient Module to be fully integrated. “The first year of the Resilience Module will help GRESB establish a global benchmark. First-year scoring is based on comprehensiveness of an organization’s efforts to address climate-risk and resilience. In the future, GRESB will place a greater emphasis on the quality and rigor of management actions,” says Chris Pyke, PhD, Research Officer at the US Green Building Council.

As property specific data has grown substantially, signaling a level of granularity not previously available at the fund level.  Energy Use Intensity (EUI) is now an internationally recognized building energy use metric.  GRESB provides the average energy intensity performance of buildings in KWh/square meter in the 2018 reporting portfolio.

1 tmp igel1Note: EUI: 1 KWh/m2 = 0.317 Kbtu/sqft

Credit: GRESB 2018

Commercial offices continue to have the best data availability.  In multi-tenanted buildings, the rise of green leases are positively narrowing the gap between landlords’ and tenants’ expectations. The mission of green leases is to align energy goals and sustain whole building high performance through cooperative controls in both the tenant spaces and common areas of buildings.  This alignment could promise further collaborations to explore onsite energy generation, waste disposal opportunities, water efficiencies, and proximity to multi-modal mobility options.

Since the launch of GRESB, there has been wider recognition of risk adjusted returns when companies rely on ESG as a tool to evaluate risks.  With the quadrennial release of the US national climate assessment report about impacts on businesses and communities on Nov 23, 2018, this approach is poised to come more in focus.  “ESG engagement offers a number of benefits for real estate investment, both in terms of reducing risk and also the potential to increase the value of properties,” asserts David Hirst, Executive Director, at London-based UBS Asset Management.  “Those benefits appear to be increasing, not decreasing, as ESG and technologies evolve.”

 

 

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