GRESB captures ESG progress and focus on resilience
The benchmark has assessed 903 real estate companies, funds and developers on their sustainability, covering a record 79,000 assets. Chris Pyke analyses the results
GRESB is a global environmental, social and governance (ESG) benchmark for real assets. Working with the industry, GRESB defines the standard for sustainability performance in real assets, providing standardised and validated ESG data to 75 institutional investors, representing over US$18trn (€15.5trn) in institutional capital. The 2018 results highlight three key trends for real asset investors:
• More transparent ESG performance;
• More progress on global sustainability goals;
• More focus on resilience.
These trends support several conclusions about the state of the industry. ESG information about real assets is more readily available and relevant to global challenges and financial performance. The new GRESB data show that there are significant differences between companies, and growing research shows that these differences have the potential to influence risk and returns. Conclusions reinforce the widely-held thesis that ESG is a material consideration for institutional investors.
The rise of ESG as an issue for institutional investors is fundamentally about transparency. The absence of ESG information contributes to mispricing of risk and value. Leading institutions are increasingly using ESG data to prioritise and price investments based on their performance on issues relevant to customers, policymakers and other stakeholders, such as operating costs, greenhouse gas emissions, health and well-being, and other material factors. Evaluating these issues requires transparency about ESG performance, for individual companies and their industry peers.
This year marked a new milestone for ESG transparency for real assets and, in turn, the availability of actionable data for investors. In 2018, a record 903 property companies, funds and developers participated in the GRESB Real Estate Assessment (figure 1). The infrastructure assessment covered 75 funds and 280 assets, and 25 portfolios completed the debt assessment (figure 2).
The new data show that GRESB participants are increasingly combining internal management processes, information technology, and third-party assurance to ensure the flow of accurate operational performance data from the utility meter all the way through to aggregated reporting to investors. This is reflected in the provision of asset-level performance indicators for 49,910 of 79,000 assets included in the GRESB Real Assessment – the highest level recorded in absolute and percentage terms.
Taken together, the increasing breadth, diversity and quality of ESG reporting is providing more actionable transparency for real asset investors.
More progress on global goals
There are many dimensions to corporate ESG performance. Over the past few years, the United Nations Sustainable Development Goals (SDGs) have emerged as a widely-accepted framework to describe and communicate important transnational priorities.
Perhaps the most fundamental SDG goal is to limit global warming to 1.5°C. According to the best climate science, this requires global aggregate greenhouse gas emissions in 2050 to be 40-70% lower than in 2010. This dramatic reduction in global emissions requires contributions from all sectors, critically including real assets. GRESB has been tracking progress in the property sector since 2009, and GRESB data have illustrated consistent year-over-year reductions in emissions among participants.
The 2018 results show these trends continued, perhaps even accelerated, over the past year. Aggregate year-over-year greenhouse gas emissions from GRESB participants declined by 4.9% from 2016 to 2017. This was driven by a 2.5% reduction in energy consumption, along with continued increase in renewable energy generation and purchasing. These reductions keep the property industry on-track to support long-term SDG goals
It is more difficult to gauge industry-wide progress with infrastructure investments. This reflects a combination of circumstances, including lower participation, a shorter history of ESG reporting, and greater heterogeneity in activities. Despite these challenges, the 2018 data show that GRESB infrastructure participants are increasingly reporting that they have established greenhouse gas emissions reduction targets, and that they are realising gains against these targets. The average participant reported an annual greenhouse gas emissions reduction of 1.1% with respect to its established emissions-reduction target. The data also provide a unique comparison of greenhouse gas emissions intensities, a measure of emissions per unit asset value (figure 4). This is one way to look at the carbon efficiency of different investment options.
There are clearly opportunities to accelerate and deepen emissions reductions in the sector. However, these new data show steady progress towards global goals.
Greater focus on resilience
ESG managing and reporting are dynamic, and periodically new issues emerge as important considerations for investors and real asset managers. This year, the focus was on resilience. In 2017, a string of global weather-related disasters resulted in $344bn in damages, including $212bn in uninsured losses. This new high watermark reflects a combination of social and environmental factors that have put more people and property at risk. Property investors are particularly exposed to these issues, as the value of relatively long-term, illiquid assets is intrinsically linked to their location and the circumstances of the surrounding community.
In late 2017, the Financial Stability Board’s Task Force for Climate-related Financial Disclosure (TCFD) provided new recommendations for reporting. These circumstances motivated GRESB to introduce a new Resilience Module for both property and infrastructure. The module was broadly aligned with TCFD recommendations, and, when combined with related indicators in the core assessments, this provided nearly 150 resilience-related data elements for each company.
The new results provide a unique picture of how companies and funds worldwide are beginning to address resilience. For most, this includes designating an internal leader and establishing clear lines of communication and accountability. This provides the foundation for increasingly comprehensive risk assessments, both for individual assets and the entire organisation. The results from risk assessments are being used to develop business strategies for new construction, operations, and acquisitions. A smaller fraction of companies have already begun systematically tracking the impact of extreme events and near misses.
Results from the new module show that property companies worldwide are beginning to pay attention to resilience. Most respondents have:
• Established clear internal leadership;
• Conducted social and environmental risk assessments;
• Begun implementing strategies during development, operations, and acquisition;
• Some are collecting data about shocks, stressors, impacts, and near-miss events.
However, the new data also show significant variation across the market, even in this self-selected group of GRESB participants. This means that efforts to promote resilience cannot be taken for granted or assumed by institutional investors, and investors need to ask targeted questions to understand how management is addressing risk and, when possible, identifying new opportunities for value creation.
The quality and impact of these actions remain impossible to evaluate. In other words, an analyst can see that these management systems and actions exist, but it is not yet possible to evaluate whether they work as intended. This is not a judgement on any specific company, rather it is an observation about the apparent state of the industry. This situation will change as disclosure about resilience-related management and practice is combined with key outcome measures, such as loss rates, asset value, and operating income.
Implications for investors
These results provide clear signals for investors:
• High-quality information about ESG performance is more readily available than ever before;
• GRESB participants are making significant progress towards global goals, critically including reducing greenhouse gas emissions and improving energy efficiency;
• Market leaders are increasingly focused on risks and opportunities associated with social and environmental shocks and stressors.
These observations help engaged investors ask critical questions to understand leadership or identify potential weaknesses in these portfolio. This will help them manage risk and returns, while potentially helping to address global challenges.
Chris Pyke is research officer for the US Green Building Council and former COO for GRESB