None of the top 60 listed real estate companies currently have asset-level sustainability plans and two thirds do not have net-zero targets, according to the first research results of Global Real Estate Engagement Network (GREEN), an ESG engagement network for institutional investors launched in 2021.
Even if one-third do have net-zero ambitions, the public real estate industry is not on track to meet net-zero targets, according to Vincent van Bijleveld, founder and managing director of GREEN. He said the industry, especially in the US, remains overly reliant on offsetting and green energy purchases, which does not remove transition risks.
The industry is also downplaying risks through non-disclosure of physical and transition risks – which will likely require more and deeper retrofits than are currently planned for – in order to not spook investors.
On the other hand, more advanced investors are already using external physical climate risk assessment tools that may overstate the risk as these tools do not and are unable to account for mitigating measures already taken on an asset to reduce the physical risks, Van Bijleveld said.
Over half (52%) are conducting physical risk assessments across their portfolios, but only 17% disclose results at portfolio level and 75% are not on track, or again do not disclose their data, on their Carbon Risk Real Estate Monitor (CRREM) decarbonisation pathways.
Among the surveyed, 86% of European companies have committed to net zero, including Scope 3 emissions, with 50% of Asian companies following suit leaving US firms lagging at 13%. Van Bijleveld said stakeholder pressure is key to even out the regional differences, pointing out that some US companies see stricter legislation as the only way to achieve deep retrofit investments.
“In the US, they are less willing to commit to something they are not certain they will achieve, whereas European, and to a lesser extent Asian, companies are working towards simply making net zero happen,” he said, adding that US companies tend to be reluctant to take on measures with long payback times.
In order to improve engagement and commitment, van Bijleveld’s message to asset managers, including generalist equity investors and passive equity managers, is for them to acknowledge that engaging the listed real estate sector is important as real estate is responsible for 30% to 40% of energy use and carbon emissions.
“They also need to demand real estate companies take more tangible steps to lower the financial and non-financial climate risks from real estate and adopt climate risk management measures that meet shareholders’ standards,” he said.
He also urged the companies to engage either as a part of GREEN – individually based on principles like those in the GREEN investor statement, or according to their own public statements about managing climate risk.
Furthermore, van Bijleveld wants asset owners to ensure that general equity and real estate managers engage listed real estate companies in their portfolios and, whenever possible, collaborate with other investors to reduce costs and increase effectiveness.
The research results are based on the sustainability reporting of the 60 largest companies in the FTSE EPRA NAREIT developed countries index, by market cap and was validated during shareholder engagement conversations.
Next year GREEN aims to expand the survey to cover 100 companies. The results will be published annually, enabling GREEN members to track progress of the initiative and their engagements. The University of Maastricht independently verified this year’s results.
The research was conducted using a proprietary dashboard tool. Maaike Hof, co-leading the initiative, explained that the dashboard is a tool for assessing the climate performance of real estate companies.
“It includes 52 indicators and measures companies’ fulfilment of all the criteria in the GREEN investor statement, which in turn helps to determine topics of engagement and track progress,” she said, adding that in this year’s survey only 15 of the indicators were met on average with the top company managing 27, with some not meeting any of the indicators.
GREEN now has 21 members based in Europe and the US, with some US$2trn in assets and expects to double its membership over the next 12 months. Current members include APG, CenterSquare, Neuberger Berman and Wellington Management. As GREEN gains traction, a growing number of large institutional investors, including sovereign wealth funds, have shown an interest in joining, van Bijeveld noted.
Separately, GREEN also surveyed smaller real estate investment trusts, through an individualised questionnaire explaining GREEN’s mission and questions focused on climate risk management. Results show that these companies are improving in their target setting and performance data disclosure. Some 77% disclose energy and GHG data and 66% have a target, out of the 284 universe of companies surveyed. GREEN members also engage non-listed real estate funds. Findings are broadly similar to the listed space.