Gaining an Environmental, Social and Governance (ESG) certification is viewed as a rite of passage for any business involved in the real estate sector, from asset owners to developers and fund managers.
ESG is a complex shapeshifting beast, which is constantly evolving to reflect the most pertinent sustainability issues of our time. At the forefront of this evolution is GRESB, which is short for Global Real Estate Standards Benchmark.
GRESB invites property owners and developers of all stripes to undertake annual performance assessments according to standards that are set by its independent sister organisation the GRESB Foundation.
Assessments are collated and published as benchmarks on an annual basis for both the real estate and infrastructure sectors. In 2022, 1,820 different real estate entities with more than 150,000 assets around the world participated across 74 countries. Participants receive a score out of a possible 100 points.
Institutional investors are the main users of the ESG data, which they use in making investment decisions. Last year, more than 170 investors relied on GRESB data for this purpose.
In the assessments, environmental data focuses on consumption of energy, water and the treatment of waste, and is aligned with recommended disclosures from the Taskforce on Climate-Related Disclosures (TCFD).
This involves scoring participants on governance, strategy, risk management and metrics and targets. Participants must also disclose their Scope 1,2 and 3 emissions and their energy intensity. Social factors covered in the assessment include gender diversity.
Rating real estate companies on the basis of their resource consumption and emissions is no longer enough to accurately gauge their ESG performance, GRESB head of Asia-Pacific Ruben Langbroek said. “We want to see more than just targets – now we look for a focus on the actions you are taking within your organisation on the assets to get the required outcomes. In the case of net zero – are you able to report on metrics/indicators? Are you consistent with SBTi?”
“We want to be rewarding outcomes rather than simply having a policy in place.”
Give the people what they want
A recent stakeholder consultation that included investors and participating companies to understand what areas they feel are not adequately covered in the standards revealed a desire on the part of investors to understand more about what property companies were doing in the biodiversity and nature regeneration space.
The consultation revealed that on the environment front, more than half of participating stakeholders said lifecycle, embodied carbon and net zero or carbon neutrality were not sufficiently covered by the GRESB assessment.
Circularity and resource management was also mentioned. Social issues that stood out in the consultation were community impact, modern slavery and health and wellbeing measures including indoor air quality.
Diversity and inclusion and executive compensation were highlighted as governance issues that could be future areas of focus in the assessments.
GRESB will use this feedback to inform the publication of a standards roadmap which is a strategic statement that will “provide visibility on the direction of travel, and outline more specifically the next set of ESG topics and key tactical developments to be considered in the GRESB Standards,” Langbroek said.
Changes to the standards that drive the annual benchmarking process will be considered by the GRESB board in August and publicly released in October to coincide with the annual performance and benchmark results. Langbroek said topics within the assessments being reviewed include residential real estate, energy consumption and performance, building certifications, TCFD alignment and physical and transition risk.
Hard to reach areas
Chunkier topics such as biodiversity, embodied carbon, net zero and diversity and inclusion are also in development but will take longer to be incorporated into the standards due to their complexity, Langbroek said.
However, progress in some of these areas is being held back by a lack of data, he added. Some companies are not yet capable of calculating the amount of embodied carbon in their existing assets, so they would be unfairly disadvantaged if an embodied carbon metric became an assessment requirement. In some respects, the standards can only evolve as quickly as the available data.
A key challenge for standard setters is to keep the benchmarks globally consistent while allowing for local variations. Langbroek said this was particularly true for ESG measures with cultural dimensions, such as racial and gender diversity, which can vary greatly across geographies.
Other emerging topics which aren’t already captured in the standards revolve around the influence of technology in real estate and infrastructure. Langbroek said the role and importance of AI, such as the use of facial recognition in buildings, and the impact of cyber-attacks on critical infrastructure were growing in importance in the eyes of stakeholders.
Rules and standards are often viewed as rigid, stationary or absolute. But given the pace at which the ESG universe is changing to adapt to the growing number of aspects of non-financial performance investors are interested in, benchmarks like GRESB need to do almost the opposite and constantly reinvent themselves to remain relevant.
This was very informative.