Entities measured by the GRESB Sustainability index are making more plans, implementing more measures, and collecting more data, says Christopher Pyke
• New construction measures to support health and well-being: 84%.
• -1.65% decrease in water use.
• -2.87% reduction in energy consumption.
Real estate is closely connected to critical global issues – energy, water, health and many more. The design, construction, and operation of property contribute to these challenges by consuming resources, emitting pollutants, and promoting unhealthy behaviours. Property also provides solutions with management and practices that reduce energy demand, conserve water, and promote well-being. In practice, this means that markets are typically composed of properties with a wide range of environmental, social, and governance (ESG) performance – some lagging and contributing to challenges, others leading and providing solutions.
Understanding and differentiating the position of property companies and funds on this continuum underlies the need for ESG scoring and benchmarking for property investments. Investors should know if their investments are providing solutions or perhaps contributing to long-standing challenges. A growing body of evidence shows that leading companies and funds reduce risk, enhance returns, and create opportunities for competitive differentiation. Conversely, more conventional entities are associated with increased odds of underperformance, volatility, and regulatory risk. ESG scoring and benchmarking provide investors with data they need to distinguish these circumstances and incorporate this information into their decision-making.
The GRESB assessment provides just this kind of insight for equity investors in listed property companies and private equity funds. The 2015 GRESB results include 707 real estate entities worth $2.3trn (€2trn), an 11% increase from 2014. The new data cover 56% of the FTSE EPRA/NAREIT Developed index and 93% of the NFI-ODCE index – the most widely used US open-end fund index.
In 2015, GRESB introduced a breakdown of the GRESB’s score into separate scores for environmental, social and governance (see figure).
GRESB provides data on two fundamental dimensions of ESG performance – management and policy (MP), and implementation and measurement (IM). MP covers the policies, procedures, and management controls required to guide and incentivise ESG performance. IM covers on-the-ground actions and key performance indicators. Both dimensions are essential, as performance without process is often a matter of luck, while process without performance is rarely of interest. GRESB combines these dimensions into a single score with a weight of 30% MP and 70% IM.
In 2015, the average performance of companies and funds reporting to GRESB improved significantly to 56, an increase from 46 in 2014. This change reflected an increase in the average MP score from 54 to 63, and an increase in the average IM score from 43 to 52. This means that, on average, companies and funds in the GRESB universe are making more plans and policies, implementing more ESG measures, and collecting more operational performance data.
Top performers on both MP and IM dimensions are described as Green Stars. In 2015, GRESB recognised 387 entities as Green Stars, again reflecting the general increase in the level of ESG activity.
Scores for overall sustainability and the MP and IM dimensions are useful aggregate measures of company and fund performance. However, it is also valuable to link elements of the assessment directly to global challenges. This gives another, more accessible view on the actions that companies and funds are taking to offer solutions for critical ESG issues. The following examples highlight specific findings from the new GRESB results illustrating achievements related to energy, water, and health – a few of many issues covered in the full report.
Efforts to address the cost and environmental impacts of energy use remain fundamental to ESG management. Inefficient properties that lag behind their peers negatively impact net operating income and asset value. Conversely, high performing assets may attract top tenants and return more income to investors. GRESB participants have begun to recognise this and take action to manage energy demand, promote efficiency, and use clean energy sources. In 2015, GRESB participants report action including:
• Specifying high-efficiency equipment: 57%
• Systems commissioning: 35%
• Upgrading building automation systems: 22%
Overall, these efforts have begun to yield demonstrable savings with a -2.87% reduction in like-for-like energy consumption – GRESB’s primary measure of year-over-year savings.
Water and waste
Global trends in energy management are mirrored by trends in water conservation and waste management. With severe drought hitting western North America and parts of Australia, many real estate investors recognise that sustainable water supplies are essential to operations and new development. Some of these lessons are relatively new or yet to be learned first-hand and, overall, water conservation measures appear to be growing more slowly than energy-related practices. GRESB reports water management strategies including:
• Occupant sensors: 33%
• Cooling tower management: 12%
• Drought tolerant/low water landscaping: 11%
Overall, these efforts are making a difference, with a -1.65% decrease in overall water use between 2015 and 2014.
Health and well-being
Health, safety, and well-being are rapidly emerging as a global priority for property companies and funds. In 2015, the World Green Building Council issued a report calling this trend “the next chapter in green building”.
The report noted that typical business operating costs have a ratio of approximately 90% staff costs in salaries and benefits, 9% property rental costs and 1% energy costs. Consequently, investment in health and well-being has disproportionate opportunities to reduce costs and create value.
GRESB participants report a variety of health-promoting strategies, such as health and safety checks, monitoring, and community engagement. In 2015, 84% of entities included measures in new construction projects to support health and wellbeing, including:
• Occupant controls: 71%
• Indoor air quality monitoring: 66%
• Natural ventilation: 61%
The global real estate industry is complex and dynamic. Many important elements of risk and value are not reflected on traditional balance sheets. ESG data gives investors insights into their current and future investments, allowing them to identify opportunities and manage risk by differentiating property that is contributing solutions to shared global challenges.
Christopher Pyke is COO at GRESB