Sustainable real estate might stand more chance of becoming mainstream were it not for the absence of an industry-agreed benchmark, woeful inadequacy of data and perennial disagreement over who will pay for it.
If you measured progress against the annual Association of Real Estate Fund (AREF) sustainability seminar, the industry is probably no nearer a sustainability benchmark now than it was when it held the first seminar two years ago.
It is hard enough to find agreement on whether there should be a single benchmark in the first place. UBS and Aviva Investors, among the participants in the seminar, believe there should be. Henderson Global Investors, in contrast, is hedging its bets: it favours the Global Real Estate Sustainability Benchmark (GRESB), but uses the JLL survey as an internal metric for asset-level performance and has signed up to Greenprint.
The industry frontrunners are Investment Property Databank (IPD) and GRESB, the benchmark of choice for APG, PGGM and Hermes. Aviva Investors' multi-manager business conducted a global annual survey of 100 funds, with a 79% global response rate. But these days, it submits 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 is not there. The problem is that occupiers have no inherent reason to engage in the sustainability enterprise.
It is not helped in the UK by the adversarial structure of the English legal system, according to Simon Keen, an acquisitions associate at law firm Hogan Lovell - though it is not 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 persuading 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," said David Hirst, global real estate head of operations at UBS Global Asset Management. The best case scenario, he said, was long-term occupiers might engage, but short-term investors would not.
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.