Sustainability won't become mainstream until push comes to shove, argues Shayla Walmsley.
Sustainable real estate might stand more chance of becoming mainstream were it not for the absence of the industry-agreed benchmark, woeful inadequacy of data and perennial disagreement over who's going to pay for it.
If you measured progress against the annual Association of Real Estate Fund (AREF) sustainability seminar, held this week, the industry is probably no nearer a sustainability benchmark now than it was when it held the first seminar back in 2009.
It's hard enough to get agreement on whether there should be a single benchmark in the first place. UBS and Aviva Investors, among the participants in this week's seminar, reckon there should be. Henderson Global Investors, in contrast, is hedging its bets: it favours GRESB, but uses the JLL survey as an internal metric for asset-level performance and has signed up to Greenprint.
The industry frontrunners are IPD and GRESB, the benchmark of choice for APG, PGGM and Hermes. Aviva Investors' AUM £5.5bn (€6.3bn) multi-manager business from 2005 conducted a global annual survey of 100 funds, with a 79% global response rate. But these days, it's submitting data to GRESB, which polls more than 340 listed and unlisted respondents with 100% response rate.
Proliferating benchmarkers ask too many questions, and often the wrong ones. They require too much detail, draw insufficient distinction between landlord and tenant and tend to conflate fund and manager performance.
Henderson, which measures across the property cycle from acquisition to sale, submitted seven funds to GRESB, but responsible property investment director Jenny Pigeon admitted it was a "major undertaking". "There's engagement to be done to make the questions more relevant to fund managers," she said. "They're quite open to interpretation."
The distinction between landlord and tenant is a significant one because these benchmarks often assume an alignment that isn't there. The problem is that occupiers have no inherent reason to engage in the sustainability enterprise.
It isn't helped by the adversarial structure of the English legal system, according to Simon Keen, an acquisitions associate at law firm Hogan Lovell - though it isn't obvious that, elsewhere in Europe, occupiers are any more willing to pay for environmental improvements that benefit their landlords. (He also pointed out that retailers are less inclined than office tenants to invest in environmental retrofit measures - not least because commercial tenants are more likely to see environmental credibility as a recruitment and retention tool.)
Just getting tenants to provide data can be difficult enough. UBS, for example, wrote to 800 tenants with a view to signing memoranda of understanding on sustainability, with a negligible response. "There is ambivalence over data collection, but sustainability credentials need tenant data - there needs to be collaboration with tenants," said David Hirst, global real estate head of operations at UBS Global Asset Management. Best case, he said, long-term occupiers might engage, but short-term investors won't.
A potential incentive for tenants to provide data, cited by Caroline May, head of environment, safety and planning at law firm Norton Rose, is competition through benchmarks that feature peer performance league tables. "It's given a strange glamour and allure to sustainability it wouldn't otherwise have had in our organisation," she said. "Tenants are more worried about the league table than cost because they don't want to appear lower on the table than their competitors."
Recalcitrant tenants are the least of it. The same issues have been hanging around so long, with only incremental progress, because neither the penalties nor the incentives are sufficiently compelling to accelerate them. To up the ante, either governments have to impose regulatory penalties on poorly performing assets or the market has to impose price penalties on them.
But sustainability doesn't necessarily have much of an impact on the decision to invest or not. Although Kathleen Jowett, global real estate multi-manager fund analyst at Aviva Investors, pointed to some successes - citing the UK industrial find that once appeared in the bottom quarter, but acted on Aviva's recommendations for improvement - it's hardly a threat of divestment.
Despite studies in the Netherlands and the US indicating that sustainability performance may have been priced into assets, there is no overwhelming evidence of price penalties. "Eventually, assets that fail, or which only just meet standards, will be valued downwards," Hirst said. "It will become a tenant requirement. If you take sustainability into account, it will feed into valuations - but we've yet to see it."
A good start would be agreement on what 'it' is. "Sustainably has to mean the same thing to everyone, using the same currency and with the same goals and financial mechanisms," said May. "The market's reaction will give it credibility, but it takes time for the market to respond, and we haven't yet got to a stage where the market can stand on its own."