Differing practices in sustainability disclosure among listed property companies have been a drag on transparency but, as Gareth Lewis reports, a new set of sustainability best practice recommendations will deliver a step change in comparability
Property companies are under pressure from a wide range of stakeholders to implement sustainable strategies and to demonstrate that they are reducing the sector's environmental footprint.
We believe that the listed property sector in particular will play a pivotal role in addressing the challenge of improving the sustainability of the built environment in Europe. The reasons for this include:
• The listed sector is heavily scrutinised by the investment community daily (around 120 investment banks and fund managers cover the sector). As a result the sector could be described as representing the ‘best in class';
• The listed sector is extremely active and liquid compared with other forms of real estate investment. Invested equity moves around the system at enhanced rates which ensures that the built environment is generally renewed more often than in other less active real estate markets;
• Publicly listed property companies are generally robust, well-managed investment vehicles. They have come through the recent ‘stress test' facing the capital-intensive property sector extremely well. Their capital structure is well suited to real estate's long-term nature, as well as in delivering the important infrastructure for Europe's economies in a sustainable way - including the regenerations of cities.
Performance reporting is a critical part of ‘greening' the built environment; investors need to understand how companies deliver on sustainability so they can reward best practice. Investors are as hungry for consistent and comparable information regarding sustainability as they are for details of financial performance.
As a part of the annual review of listed companies in the EPRA/NAREIT FTSE European index companies for the purposes of the EPRA Best Practice Recommendations Awards, Deloitte undertook an initial review of sustainability reporting in the sector. The results showed that 36% of companies in the index refer to specific carbon reduction targets and over 50% of the largest companies in the index included sustainability reporting.
In response to this increasing pressure for comparable sustainability reporting, EPRA decided in 2009 to form a sustainability reporting committee with a view to engaging with its broader membership to better understand the listed European real estate industry's views and needs on voluntary and mandatory reporting.
With the support of Jones Lang LaSalle, EPRA has been engaged in continuous dialogue with its members in order to formulate an EPRA view on what performance indicators we should prioritise so that we can encourage property companies (large and small) to adopt these as a minimum. Consultations took the form of online surveys, in-depth interviews with mature and newcomer sustainability reporters as well as numerous meetings, conference calls and workshops.
Our first objective was to establish consensus on the measurement and disclosure of a number of priority sustainability performance indicators (KPIs) and reporting protocols for buildings in use, in the European listed real estate sector.
Second, we developed a policy position on sustainability performance indicators in order to contribute actively to the development of future initiatives and regulation to ensure that these are aligned with EPRA's position, particularly the Global Reporting Initiative (GRI).
Finally, we developed EPRA Best Practices Recommendations (BPRs) - building upon relevant mandatory reporting requirements and voluntary initiatives, in particular the GRI Construction and Real Estate Sector Supplement (GRI CRESS).
One of the key findings from our consultation has been the breadth and range of practice in sustainability disclosure, which is hindering company analysis as well as robust company-to-company comparison. We also found an emerging consensus on key measurement issues such as defining organisational boundaries for greenhouse gas emission reporting and alignment of disclosure standards with financial reporting principles.
After months of intense discussions and industry feedback, EPRA has now reached a point where we feel we have secured broad consensus on a number of important sustainability reporting issues. Our work on developing the first edition of the EPRA Sustainability BPRs is almost finished, with the soft launch for the membership due this summer, and a full public launch at the Annual EPRA conference in London on September 1-2.
Primed for success
So, what chance success? The answer lies in our proven success in establishing best practices in financial reporting. This is largely for two reasons. First, our approach is always about establishing consensus on the priority performance disclosures - so that the recommendations are relevant and useful to all companies large and small. Second, the very fact that the EPRA BPRs are developed through discussion with the ‘preparers' themselves (the property companies), investors and advisers means that the end product is something that already has the buy-in from all relevant stakeholders.
By way of example, if the top 20 out of 80 companies in the EPRA index are involved in and support the EPRA recommendations, this would represent around 70% of Europe's listed property market - enough to create sufficient momentum and make a real improvement in consistent reporting. Figure 2 shows the existing adoption of the EPRA BPRs for financial reporting and we are confident of emulating similar levels of adoption for the Sustainability BPRs.
We are confident that listed property companies will respond positively to the challenges and continue to play their role as pioneers for the broader sector in improving the sustainability performance of the built environment.
Gareth Lewis is director of finance at EPRA