Real estate benchmark takes sustainability to the capital markets
On April 1, the organization I direct, the Global Real Estate Sustainability Benchmark, launched its 2014 Survey, marking the start of the annual assessment of the sustainability performance of property portfolios around the globe. GRESB was launched in 2009, with the purpose to provide pension funds and their trustees with more information on the “greenness" of their investments in real estate.
If you work in the green building industry, GRESB may not be familiar to you, as it focuses on providing sustainability data to investors in property companies (REITs) and private equity real estate funds, rather than assessing the greenness of individual assets. But though those two worlds seem far apart, they are in fact closely linked.
Where LEED and its global equivalents provide a standardized assessment on the energy efficiency, water efficiency and other environmental characteristics of buildings including offices, shops and schools, GRESB aims to provide the global industry standard for the assessment of the environmental, social and governance (ESG) performance of real estate portfolios. Those portfolios typically include anything ranging from just a few to hundreds of individual assets, and are managed by professionals such as Brookfield, Prologis, Prudential and Vornado.
A "nutritional label" for the capital market
GRESB's goal is to provide real estate investors with the tools they need to monitor and manage sustainability performance accurately, and to prepare for increasingly rigorous ESG obligations. Investors need this information to better understand immediate sustainability risks surrounding issues such as flooding or regulation regarding minimum energy-efficiency requirements. They also need it to zoom in on sustainability-related investment opportunities, such as the repositioning of inefficient assets that might otherwise become obsolete. It's about protecting and enhancing shareholder value, based on academic evidence that sustainability and financial performance are positively related in the real estate sector.
In a recent issue of the Economist, this argument is further laid out: Better information helps to steer investments away from polluters, and capital to those that manage ESG risks and opportunities in a positive way. USGBC CEO Rick Fedrizzi describes LEED as "a nutritional label, like on a box of animal crackers," and GRESB tries to provide exactly that, but…now for the capital market (read this CNBC article for more information about the future of the real estate sector).
To add some more acronyms to the mix: The GRESB benchmark is aligned with other globally recognized reporting frameworks such as the Global Reporting Initiative (GRI), the Principles for Responsible Investment(PRI) and the Dow Jones Sustainability Index (DJSI). But those frameworks are typically sector-agnostic and focus mostly on large, listed companies, whereas GRESB examines sustainability-related issues specifically for the real estate sector. This includes strategies, policies and objectives, as well as measuring environmental performance data regarding energy and water consumption, GHG emissions and waste. The benchmark also investigates the use of voluntary standards and certifications such as LEED and Energy Star, so in the end, all actions taken at the asset level roll up into a metric for the portfolio.
GBIG, a new tool developed by the USGBC, will help with that aggregation. The data that GRESB collects, and the ratings it provides, are not meant just for socially responsible, mission-driven investors, such as Calvert, the Catholic Brothers or Trillium, but rather for your average pension fund, its fiduciary manager or its investment consultant. These capital providers are typically significant in size, and the pool of capital using GRESB data now includes more than 100 institutional investors, fund managers and property companies managing $6.1 trillion in assets. And that excludes a part of the capital market that has not even started to seriously think about the implications of sustainability for investments: the debt market.
Sure, there are some loans to green buildings, but not many banks will incorporate sustainability characteristics in their underwriting of corporate bonds or commercial mortgages. Some action is on the horizon, though — with, for example, a recent green bond offering by Unibail Rodamco, Europe's largest REIT.
The real estate industry's sustainability push
In the meantime, the real estate industry has taken notice. Following pressure from investors, regulators and building occupants, the industry has started to look more closely at sustainability issues, with many property companies and fund managers integrating sustainability into their overall business strategies.
In 2013, 550 property companies and funds participated in the GRESB Survey (here's the complete list of reporting companies and fund managers), managing $1.6 trillion in value. While 550 companies and funds may sound trivial, the GRESB database covers 49,000 assets in 46 countries.
In 2014, GRESB is looking forward to further increasing the transparency of the real estate sector, starting at the portfolio level, then drilling down into the sustainability performance of individual assets. Imagine the opportunity in improving the efficiency of those 49,000 assets for cost savings and carbon reduction.
Key photo by Mara008 via Shutterstock