Environmental metrics must be accessible and demonstrate the significance of sustainability to the bottom line if we are to expect greater engagement from investors. Paul McNamara reports
Meaningful metrics are key to reducing carbon emissions from property. Without them, investors and policy makers cannot gauge the environmental performance of buildings or progress being made to improve it.
Thankfully, well-intentioned environmental experts have given their time and expertise, often voluntarily, over many years to debate and establish the metrics, standards, codes and labels by which the environmental performance of properties can be measured. However, with its characteristic standoffishness, the property investment community has viewed green issues as ‘technical' and of limited direct relevance to its fiduciary duty. As such, these metrics have developed with little or no input from investors.
This situation is no longer tenable and the time has now come for the property investment community to engage properly in environmental metrics development.
The natural focus of environmental technicians is to establish the ‘best' environmental measures. As such, debate has focused on which variables or descriptors to include in metrics and labelling schemes and how best to define them. The behavioural driver here is to be comprehensive in describing a building's environmental credentials. This creates our first major problem.
Each environmental variable selected represents a data requirement to be met by property owners and managers. The more ‘comprehensive' the measurement regime becomes, the more data is required - and most current labelling schemes are very demanding. Take a typical institutional property portfolio with 50 properties and the environmental performance measurement of each property requires 50 questions to be answered, then 2,500 answers are needed in order to measure the environmental credentials of that portfolio.
The concern here is clear. However well-meant and technically rigorous they may be, if data demands appear too onerous, property owners and fund managers are likely to resist or delay their engagement with measurement regimes. We need environmental metrics that can match the technical requirements of measuring a building's environmental performance but that are also sufficiently practical to engage investors in measuring the environmental performance of their funds.
Many of today's labelling schemes may be manageable when applied to the individual, new, construction schemes they were originally designed for. However, developments are of minor importance compared with existing stock with respect to potential carbon emission reduction. As such, property metrics should focus on the real need - whole portfolios of existing stock.
This is beginning to happen now. In Japan, CASBEE is discussing a ‘short-form' version of their property metric and in the US and Europe, LEED and BREEAM are also beginning to roll out short-form versions of their better-known measurement schemes, for existing stock.
A second issue for investors is the proliferation in metrics and the lack of co-ordination between them. The property investment community is today faced with a bewildering and growing array of metrics, standards, codes and labels. It is baffled and irked by the ever-thickening ‘alphabet soup' of building metrics (and the organisations behind them) with which they are expected to work. They are unsure of the best or most enduring measures to adopt. This problem is exacerbated for international investors faced with taking domestic metrics into locations where they are unrecognised, or using less familiar native metrics.
Some investors have taken matters into their own hands and established their own environmental metrics for common use or have attempted some kind of ‘thesaurus' to match the disparate metrics against each other. The work of the Green Rating Alliance and the Greenprint Foundation are prominent examples of the former; our own work with the United Nations Environment Programme Sustainable Buildings Climate Initiative (UNEPFI and UNEP SBCI, 2009) is an example of the latter.
It is naïve to expect the issue of environmental metrics proliferation to be resolved easily; there are substantial personal and organisational vested interests and understandable pride is taken in the metrics and labels already established. There are also geographic loyalties among investors, who favour the metrics prominent in the markets they operate in.
However, neither of the above barriers is insurmountable nor a reason for not trying to improve the current chaotic situation.
Environmental vs fiduciary focus
To date environmental performance metrics have generally focused on understanding the impact a building has on the environment. But many investment professionals have deemed these metrics of limited relevance to their fiduciary duty. So, if the results of environmental performance of buildings on investment performance can be shown, it becomes their fiduciary duty to understand metrics.
As such, investment professionals are likely to be most interested in data that reveal those environmental features of buildings that affect investment value. Given the early nature of this science, investors are expending considerable cost on data they struggle to get any return from - this hardly encourages them to get involved.
The fact that many metrics relate to individual buildings and not whole portfolios means that those investors being asked to supply data are unable to benchmark themselves against their competitors but, rather, are faced with partial data sets relating to (often ‘cherry picked') individual assets.
Beyond understanding the relationship between environmental and investment performance, the second interest managers have in the environmental performance of portfolios is whtether it influences asset owners to hire them or not.
So far, the development of property metrics has been supplier-led rather than user-led. It has also had a focus on new construction projects rather than on existing properties. This has led to an unsatisfactory situation where the needs of neither financial institutions nor environmentalists are being met, while traction on data provision is disappointingly slow. It is also a situation rich in irony.
First, the very passivity of the property investment community towards metrics means they have been created in a conceptual vacuum. In turn, this lack of involvement has contributed indirectly to the current confusion and chaos now frustrating it.
Second, through being both naïvely over-demanding and uncoordinated, metrics providers are failing to engage those whom they need to provide data, and hindering the take-up of their own products. To gain the buy-in of asset owners and property fund managers and truly succeed in establishing a widespread system of environmental performance measurement, metrics providers must be more tactical and less purist - at least in the early years.
Investor needs and environmental metrics
With the aim of encouraging the take-up and success of environmental metrics, we now explore what the needs of property investors are with respect to metrics. The following remarks form the basis for ongoing work by the UNEP FI Property Working Group. What follows is based on the answers to two questions, namely,
• What do responsible property investors want metrics for?
• How should environmental metrics for property be developed to increase their adoption and impact on the activities of property investors?
First, what do responsible property investors want metrics for?
Responsible property investors are likely to want property environmental metrics for a range of reasons. As the significance of the environmental performance of their properties (and, in aggregate, their portfolios) to both the financial performance and the overall reputation of their funds and businesses grows, investors will want to understand how they stand in absolute and relative terms against their competitors.
This is not only with respect to the current environmental performance of their assets and funds but also how that is changing. This analysis might be described as ‘environmental performance measurement' and, in many ways, resembles the early days of investment performance measurement in the mid-1980s (which also developed after a brief period of competing metrics providers).
Second, investors are keen to link environmental performance metrics with investment performance metrics to better understand the significance of the former to the latter. Just as the overall investment performance of a property is influenced by many different variables (eg, prime-ness, covenant strength, unexpired lease term, etc.), property investors will want to understand how specific sustainability-based variables affect asset values and portfolio performance.
Third, metrics are also needed to support taking action. As such, investors will want information on the costs of different environmental improvements, and the scale and payback rate of any benefits.
Second, how should environmental metrics for property be developed to increase their adoption and impact on the activities of property investors?
The variables in the figure above are generally perceived as having the easiest link to asset value and performance and are thus most likely to prove of interest to investors. Since they also cover most of the major environmental issues, they also form the natural core content for any metrics system that seeks to satisfy activists and investors simultaneously.
Given the growing dismay across the property investment community over the current state of environmental metrics, UNEP FI Property Working Group is keen to encourage metrics providers to work harder to forge greater compatibility across the various metrics systems. Some progress is being made here but it needs to be greatly accelerated - assisted where possible by the property industry worldwide.
If this does not occur, more investor-led initiatives (such as those by Greenprint and the Green Property Alliance) will emerge, as investors themselves attempt to solve their own concerns with environmental measurement.
We strongly urge metrics providers to accelerate the development of short-form versions of their complete metrics to facilitate the growth of portfolio-level measures of environmental performance as the need for portfolio-wide metrics increases.
If property environmental metrics providers want to gain better traction with investors, they need to:
• Prioritise variables with the greatest potential to impact value and performance - other variables can be added later;
• Be moderate in the requests they make, asking only for essential data initially to make the collection task less onerous for investors;
• Develop simple but meaningful measures that are easy to understand and to provide data for;
• Ensure metrics are applicable at portfolio level in addition to asset level.
Investors, environmentalists and policy-makers need more and better information to understand fully the environmental performance of the current built stock, to increase their understanding of how environmental and investment performance are linked, and to measure the effectiveness of actions taken.
To achieve this, the property investment community needs to engage much more in the design and provision of environmental building metrics - and the metrics providers need to facilitate this.
It will not be easy but, by making metrics systems more compatible, simpler, more relevant to investors and more capable of capturing whole portfolio performance, progress can be made.
Greenprint Foundation: can be reviewed at www.greenprintfoundation.org
The Green Rating Alliance can be reviewed at www.green-rating.com
Institutional Investors Group on Climate Change (2010): Climate Impact Reporting for Property Investment Portfolios: A Guide for Pension Funds and their Trustees and Managers, IIGCC, London
UNEP FI PWG (2007) Responsible Property Investment: What the Leaders are Doing, UNEPFI Property Working Group, Geneva
UNEP FI PWG and SBCI (2009) UNEP FI/SBCI's Financial &Sustainability Metrics Report: An international review of sustainable building performance indicators & benchmarks, (authored by Claire Lowe and Alfonso Ponce), Geneva and Paris
Paul McNamara co-chair, United Nations Environment Programme Finance Initiative, Property Working Group. Paul McNamara is also director, head of research, Prupim