Is 2017 a tipping point for ESG in institutional real estate? The latest GRESB numbers suggest it could be 

A record 850 property companies, real estate investment trusts (REITs), funds, and developers participated in the 2017 GRESB Real Estate Assessment, representing 77,000 assets and over $3.7trn (€3.1trn) in assets under management (see GRESB real estate assessment 2017). 

To add some market context to those numbers, the dataset includes 23 of the top 50 REITs in the US, and 75% of IPE’s Top 100 Real Estate Investment Managers ranking (participating with at least one fund). Additionally, with the introduction of the new public disclosure ranking, the data has 100% coverage of the FTSE EPRA/NAREIT Developed index and 100% of the GPR 250 index.

This comprehensive data of industry-specific environment, social and governance (ESG) information, combined with a stable group of participants since the inaugural assessment in 2009, means we can now develop insights in several new directions.

First, we are well-positioned to track the performance of the sector against key national and policy goals such as the United Nations Sustainable Development Goals (UN SDGs) and the Paris Climate Agreement. Second, we can start to set targets based on a bottom-up analysis of asset level data per country and region.  And third, we can meaningfully assess the link between financial and ESG performance (see GRESB participants aligned with UN SDG target).

The outcomes of the assessment are reflected in a GRESB score, which is a combination of management/policy (28% weight) and implementation/measurement (72% weight). In 2017, the global GRESB score is 63 (out of 100), an increase of three points from 2016.

Consistent with previous years, real estate companies and funds that have been early adopters in reporting to GRESB outperform those that start later (see Continuous reporting leads to improved results). But the rate of increase year on year is slowing because many top performers find they have already made the most obvious improvements. It is also notable that, as sustainability practices have spread throughout the market, first-year participants are starting with an increasingly higher GRESB score.

The result is a smaller gap in GRESB scores between the top 10% and bottom 10% of reporting entities (this multiple is 3.5x, down from 3.9x in 2016). A similar narrowing can be seen when comparing the difference in performance between regions, and between listed and private entities. For the seventh year in a row, Australia/New Zealand outperforms the other regions – but in 2017 the gap has narrowed. In the same manner, while listed companies still achieve a higher average GRESB score than private entities (66 compared with 62), in 2017 the difference in scores is smaller than in previous years (see GRESB score for private versus  listed entities).

This year we looked back at data from participants that have consistently reported to GRESB since 2012. The trends show a significant shift in practice over the past five years. Here are some examples:

• In 2012, 24% of participants collected energy data. In 2017, it is 60%;

• In 2012, 23% of participants have sustainability clauses in their lease contracts. In 2017, it is 80%;

• In 2012, 46% of participants incorporated sustainable factors in their board of directors. In 2017, itis 78%;

• In 2012, 22% of participants distributed tenant engagement guides. In 2017, it is 63%;

• In 2012, 37% of participants organised tenant engagement meetings. In 2017, it is 76%;

• In 2012, 10% of participants included health and well-being indicators in their environmental policies. In 2017, 30% made voluntary reports against a standalone health and well-being module consisting of 10 dedicated indicators.

The trends tell the story of a sector that has made rapid progress in data availability, understanding tenant spaces, tenant engagement and ESG integration. It is a story which only gets stronger when you consider the fact that the 2012 cohort was composed of sustainability pioneers. What is more, with like-for-like reductions in CO2 emissions, water use, landfill waste and energy consumption over six consecutive years, it is clear that the shifts in business practice have not only resulted in better transparency and engagement, but also in tangible performance improvements.

Are these improvements enough?

It is one thing to be able to track performance improvements over time. It is another altogether to answer the question: are these improvements enough?  

To start addressing this question, we tracked the like-for-like portfolio energy consumption change of GRESB participants as a determinant to measure energy efficiency improvement, and compared this to UN SDGs target 7.3. The target aspires to double the energy efficiency rate of improvement by 2030 and requires a 2.6% compounded improvement rate to achieve it. Given the commitment we have seen from long-term GRESB members, we were not surprised that participants who submitted data have stayed ahead of this target between 2010 and 2016. What did surprise us was how well participants are aligned with the SDG target from 2017 to 2030.

To track the performance of the sector against the Paris Climate Agreement we looked to World Bank guidance stating that a 36% reduction in total CO2 emissions in the real estate sector is required by 2030 to stay within the 2°C threshold. This translates to a 1.25% reduction in annual energy consumption and a 3% reduction in annual emissions. Despite year-on-year improvements for both indicators, with a 1.1% reduction in annual energy consumption and a 2.2% reduction in carbon emissions in 2017, the GRESB universe is currently falling short of what is needed.

“GRESB’s collaboration with the world’s largest pension funds, academics, investment managers, property companies, service providers and industry associations has helped define ESG concepts and frameworks for the real estate sector”

Through advancements in asset reporting practices and the support of GRESB’s data partners, we are more able to generate a detailed picture of energy intensity in different built environments. For example, in 2017 we are able to analyse the energy intensity of commercial office buildings across regions for the first time (see Office energy intensity by region). As more sectors provide sufficient observations, these benchmarking abilities will help portfolio managers of all property types and regions to improve their energy efficiency profiles.

Unlike sectors where a lack of commonly accepted definitions on ESG has slowed progress, GRESB’s collaboration with the world’s largest pension funds, academics, investment managers, property companies, service providers and industry associations has helped define ESG concepts and frameworks for the real estate sector that have now become the global standard. This harmonisation has laid the groundwork for global comparability, increases the efficiency of validation and contributes to better understanding between real estate investors, the companies and fund managers in which they invest, regulators and other stakeholders.

So, with investors demanding more transparency from the real estate sector, regulators mandating more ESG disclosures and tenants, owners and other stakeholders demanding more sustainable, greener and healthier buildings the sustainability movement is reaching critical mass.

Add to this a growing body of data that help support and quantify the business case – the most recent study being the 2017 Tilburg University  analysis* of all INREV funds showing that a 10-point higher GRESB overall score corresponds with 34bps higher annual total fund return – and the direction the sector is heading is clear.

We congratulate the regional sector leaders  and all 850 companies and funds that reported on their ESG performance this year. The leaders today are building on the important work of their predecessors, just as they pave the way for future efforts to achieve our shared vision for a sustainable real estate sector.

* Sustainable Insights in Private Equity Performance: Evidence form the European Non-listed Real Estate Fund Market, by Dirk Brounen (Tilburg University) and Maarten van der Spek, July 2017. TIAS Working Paper, see here

Claudia Gonella is marketing and communications director at GRESB