Comparing sustainability practices in the real estate industry isn't easy. Some companies monitor and disclose how they manage natural resources. A great many of them don't. The lack of comprehensive data acts as a blindfold for investors, covering up their exposure to environmental and social risks. In the next month or so — the precise date hasn't been fixed yet — the blindfold will fall to the floor.
What you'll see when this happens is an index series (picture lots of numerical tables) measuring real estate portfolios based on the share of assets that are certified as green properties. FTSE Group, a market research firm, is developing the index series in a partnership with the real estate industry association NAREIT and the nonprofit U.S. Green Building Council. The series will be subdivided into real estate industry segments, such as apartments, offices and shopping centers. It's due to go live by March 31, according to USGBC's vice president of research, Chris Pyke.
The green-property index will feature the same set of real estate investment trusts, or REITs, that comprise an existing benchmark for U.S. real estate. Each of these 172 companies will receive a score based on the proportional value of their holdings that have achieved LEED certification or Energy Star labeling. Pyke says institutional investors will be able to purchase these individual scores as guidance for their own asset allocation. Retail investors will have open access to composite data for the various segments of the index but not the individual scores.
The level of transparency accompanying the green-property index marks a significant step forward for an industry that's traditionally relied upon voluntary disclosures for comparative sustainability data. About 16 percent of companies listed in the FTSE NAREIT index participated in the 2012 Global Real Estate Sustainability Benchmark, an annual survey of publicly listed REITs and private funds, while the green-property index will capture all of FTSE NAREIT members.
Will the green-property index green the market?
Recent academic research has shown that green properties have positive effects on operating performance, and they help protect stocks against business cycle volatility. Pyke says the green-property index should encourage companies to act on this information. "It'll create another reason for them to examine their own properties and consider using LEED or Energy Star to provide more information about the achievements and performance of these assets," he said.