As a real estate owner or operator, if you haven’t been asked about ESG yet, you will be soon.
Environmental, social, and governance (ESG) policies, processes, and programs are increasingly viewed as a proxy for good management. ESG efforts often reduce risk and enhance engagement with tenants, residents, employees, community leaders, and investors. As such, more and more investors are asking about companies’ commitments, performance, and progress on ESG initiatives – with a growing number requiring some level of capability around ESG.
ESG falls squarely into “the right thing to do” category for not only a company’s ethical and fiduciary obligations but also for their business’s bottom line.
To get buy-in from the executive level – if they haven’t bought in already – leadership must be educated on the value proposition, including the associated risks of not taking action.
Remember, executives are often too busy with concerns about day-to-day operations and meeting their business objectives to track local ESG ordinances and regulations or follow public policy, in general.
But if investors see these efforts lacking, there is an increased risk of making a company “un-investible” – and no real estate organization or business wants to be off any investor’s list.
During a recent Grace Hill webinar, John Falco, Executive Vice President, Grace Hill, led a conversation about the value of ESG and the benefits of benchmarking ESG performance using GRESB with Brenna S. Walraven, RPA, CPM, BOMA Fellow, President and CEO, Corporate Sustainability Strategies, Inc.
What Is Tracked
ESG means tracking more than environmental aspects. Governance is about how the organization mitigates risk, controls, compliance, and aligns interests with stakeholders. Social includes diversity, equity, and inclusion (DEI), health/wellness, indoor air quality (IAQ), and engagement with employees, investors, customers, and the community. These things can also be measured and benchmarked by conducting regular employee and resident surveys.
A company’s ESG commitment can be measured through a GRESB Real Estate Assessment process and benchmarked against peers. GRESB considers the company’s ESG activities through performance and management related activities; scoring is between 1 to 100. Since 70% of the scoring in GRESB is tied to performance (energy, water, waste, greenhouse gas emissions, building certifications, and engagement with tenants and communities), taking steps to better understand utility usage and performance, as well as proactively engaging with tenants, are critical to GRESB success. And again, these indicators will be how institutional investors increasingly evaluate performance.
The GRESB score is a relative benchmark because scoring is always placed in context to how industry peers are doing; as peers improve, so too does the difficulty of scoring. Walraven mentioned AvalonBay, Bozzuto, Kilroy, Hudson Pacific Properties, Vornado, and AIR Communities as being among the leading companies for ESG.
Walraven notes, “Investors are increasingly asking and even requiring greater transparency and performance.” To that end, GRESB is one of the best mechanisms to demonstrate both.
Resident, tenant and employee surveys are one key part of the overall GRESB program. Surveys conducted in the past three years will be accepted. Still, according to Walraven, “It’s highly recommended to do them annually because your residents, tenants, and employees are changing, and getting more up-to-date feedback is important in driving service delivery and satisfaction.
“There are growing studies that show applying DEI best practices can help companies reduce blind spots and get to better business decisions.
“You cannot fail a GRESB survey, and most of my clients don’t tell me that they want to rank No. 1, but all of them tell me that they don’t want to rank last. Remember, when you look at scores, it’s a bit like the Olympics. The top five companies might be separated by only fractions of a point, but they’ve all given an Olympic performance.”
A GRESB survey is a portfolio level, relative benchmark and should not be confused with or compared to property level certifications like LEED, ENERGY STAR, and BREEAM. GRESB success is not only about disclosure and performance on ESG aspects, but ESG efforts in the context of a company’s peers – by geographic region, property type and whether the portfolio is publicly or privately held. There’s a separate GRESB survey for developers because they typically are not involved in the “performance” of their properties but still should have the management policies and programs at the company level.
An Eye on Regulations
In some cases, local and state-level legislative and regulatory requirements drive increased focus on ESG, including required energy benchmarking and disclosure, as seen in over 30 cities and three states. Legislation such as Local Law 97 in New York City, and others, are specifically tied to decarbonization and renewables.
For example, to maintain a healthy atmosphere, the IPCC estimated that by 2030 carbon emissions must be cut by 45% from 2010 levels. In the U.S., existing buildings are responsible for 40% of CO2 emissions, making it a prime sector in the fight for a more resilient and thriving future.
Walraven adds, “Over 98% of the country’s building stock is made up of structures that already exist, and over 75% of them are over 20 years old and require efficiency and resiliency improvements.”
“Investing in efficiency both for existing buildings – retrofits – and new construction are a win-win solution to environmental and economic perspective.”
Why Participate in GRESB
Because GRESB is a framework of best practices, the benefits of participation allow real estate owners and operators to benefit from improving performance across multiple aspects of the real estate business. Specifically, seventy percent of scoring in GRESB is tied to ESG performance, and intuitively it makes sense that if we benchmark energy, water, waste and greenhouse gas emissions, better monitor our usage and continually look for ways to become more efficient, this will save money. As properties get more efficient, operators are better able to control temperature and thus comfort – which in turn supports better occupant satisfaction and retention. Further, if we create working environments that are more inclusive and support diversity, organizations get better decision making, less blind spots which lead to better business outcomes – and too better GRESB performance. Finally, participation in GRESB enables better engagement with investors and sends a signal that the organization understands the importance of ESG, which is increasingly seen as a proxy for good management.
GRESB members recently were surveyed on the reason why investors participate in GRESB assessments:
- 89%: Demonstrate commitment to ESG.
- 70%: Engagement tool with investors and other stakeholders.
- 56%: Puts performance in perspective to a benchmark.
- 59%: Insight into ESG best practices of industry/peers.
- 59%: Identifies areas of risk, opportunity, and impact of portfolio assets.
- 52%: Guide for development of internal ESG strategy.
Further, the survey asked for the reasons investors use GRESB Assessment:
- 85%: Access to validated and standardized ESG data of investments.
- 81%: Analyze the environmental footprint of the overall portfolio.
- 74%: Monitor how managers are managing ESG risks, opportunities, and impact.
- 70%: Engagement tool with managers.
- 67%: Understand where the organization stands against a benchmark.
GRESB survey questions vary, and Walraven said the following are the most material ESG issues in the next five years:
- Net-zero/carbon neutrality
- Climate change
- Life-cycle assessment/embodied carbon
- Energy consumption
When You’re Ready To Dive In
GRESB allows companies to review the survey before deciding whether to participate.
For those choosing to, Walraven says the best results “come when a consultant first meets with the company to assess its goals. Next, an ESG plan is developed around those goals, one that fits the company culture, portfolio and vision.
“It’s tough to do a GRESB without a consultant because it’s time-intensive. You might need to dedicate several employees to get through it, and it can take the better part of six months to prepare and get through the submission process. This is why many real estate organizations rely on ESG consultants to help them prepare for and submit to GRESB.”