by Deborah O’Connor of Emergent Africa

The importance of interoperable industry-specific frameworks relevant to the Real Estate Market

In recent years, the real estate industry has witnessed a significant transformation driven by the growing importance of Environmental, Social, and Governance (ESG) principles. ESG considerations have become paramount for real estate investment companies as stakeholders increasingly prioritise sustainability. The real estate sector is one of the heaviest contributors to climate change: according to the IEA (International Energy Agency) Global Status Report for Buildings and Construction (2020), the sector was responsible for around 35% of global energy use and 38% of energy related carbon dioxide emissions.

The real estate industry also faces many interconnected challenges that fall under the ESG umbrella, including climate change, resource depletion, social inequality, and governance issues. These challenges can have a significant impact on the value, reputation, and resilience of real estate investments.

This shift is being propelled by changing investor and consumer preferences with sustainability emerging as a key factor in influencing investment decisions with stakeholders seeking properties that align with ESG principles. In addition, there is a growing awareness of social responsibility, prompting real estate companies to integrate both social and environmental considerations into their business strategies.

According to the Emerging Trends in Real Estate®: Europe 2024 Survey (joint survey undertaken by PWC and Urban Land Institute), ESG is no longer a nice-to-have but rather a ’A licence to Play’. Despite the prevailing economic uncertainty, the survey confirms that the issues around sustainability and ESG compliance cut across every aspect of real estate, short- and long-term. The interlinking challenges of environmental sustainability, regulation and asset obsolescence (due to energy efficiency standards across Europe, for example) are already significant and are only expected to increase in importance over the next 5 years.

‘’ESG is no longer just seen as creating a lease to collect rent, but investing in space required to meet the most fundamental needs of society’’ – JLL Global Real Estate Outlook

ESG principles not only contribute to environmental and social well-being but also enhance operational efficiency and financial performance in the real estate industry. By implementing water and energy-efficient building technologies, selecting sustainable building materials, and developing innovative waste management strategies, companies can lower operating costs and increase profitability.  According to the PWC Emerging Trends in Real Estate Survey, there is also strong agreement about the importance of ESG credentials to future real estate capital values. Properties that demonstrate a commitment to sustainability (including social impact and transparent governance) are more attractive to tenants and investors who prioritise these values. This also includes attracting the best potential employees to the organisation. Furthermore, ESG initiatives can enhance marketability, and therefore serve as a powerful differentiator for real estate properties in an increasingly competitive market.

Investors are also increasingly recognising the link between strong ESG performance and long-term financial returns, making ESG integration a strategic imperative for real estate companies. The top-performing entities typically have well-developed management policies which positively influences performance management. Trends indicate a positive shift in both management and performance among real asset companies and funds signifying genuine improvement in the industry.

Across Europe, not only is retrofitting or repurposing of buildings seen as a good way to secure a high-quality asset, it also plays into the trend of increasing resistance amongst investors to new development. Approximately 62% of the abovementioned survey respondents agree that retrofitting or repurposing is the best route to acquire high ESG performing assets, against 38% in favour of new development.  Real Estate companies in South Africa are addressing their climate commitment through embedded generation projects or through entering into renewable energy power purchase agreements with Independent Power Producers. South Africa has recently seen the first multi-jurisdiction, multi-building, multi-sourced renewable energy wheeling arrangement which will allow tenants to access green energy and reduce their carbon footprint.

ESG considerations play a crucial role in identifying and mitigating risks in real estate investments. By addressing climate risks for example, companies can enhance their resilience against legal, economic, and environmental threats. Moreover, ESG helps mitigate reputational risks and safeguard investments by fostering transparency, accountability, and ethical conduct within the organisation.

The question for property owners is no longer “Should we incorporate ESG into our properties?” but rather “How and to what extent should we incorporate ESG into our properties?” The successful implementation of ESG requires collaboration between owners and investors, property managers, and tenants. Property managers and tenants play a crucial role in translating ESG goals into tangible actions and outcomes on a day-to-day basis. Strategies for implementing ESG in real estate operations include monitoring performance, ensuring compliance, providing training and education, and fostering continuous improvement. Property managers are key to ensuring that ESG policies come to full fruition in the daily operation of the property.

Due to the impending mandatory ESG regulations, companies that embody ESG into their portfolios early on will also not have to made sudden changes that their non-abiding counterparts will have to make.

Real Estate Specific ESG Reporting Frameworks

Real estate companies are increasingly recognising the importance of ESG reporting to demonstrate their commitment to sustainability and their role in driving transparency and accountability.  ESG reporting in the real estate sector involves disclosing information on ESG practices. This information provides stakeholders with insights into how real estate companies are managing ESG risks and opportunities. ESG reporting typically covers a range of topics, including energy efficiency, greenhouse gas emissions, diversity and inclusion, community engagement, ethics and compliance, and board composition.

In general, industry-specific reporting frameworks can add value to ESG reporting if they provide the specificity and granularity of metrics to drive transparency and accountability for ESG performance relevant to that sector. Industry-specific frameworks, however, ultimately can only add value if they are interoperable with the major global reporting frameworks. This interoperability of ESG frameworks is not only key for the purposes of driving desired actions through coherent transparency across reporting parameters, but it also helps relieve the reporting burdens on the various reporting entities. Ensuring that reporting frameworks feed into a consistent data chain and that consistent taxonomies are applied, should reduce the need for duplicated data capturing and validating by every reporting entity. 

To this end, GRESB (formerly the Global Real Estate Sustainability Benchmark Standard), an independent organisation providing a comprehensive framework and benchmarking tool for evaluating real estate companies based on the sustainability of their business practices, has developed a common language and a standardised approach to measuring and reporting on ESG performance within the property sector. With ESG risks and opportunities being industry specific, having data and a benchmark tailored to assets, allows for direct comparisons, and provides actionable insights. Financial institutions and investors, therefore, turn to GRESB to provide the underlying validated ESG performance data and peer benchmarks of listed real estate and infrastructure companies. In 2023, more than 2000 real estate entities (representing more than USD 7 trillion Gross Asset Value (GAV)) reported their ESG data through GRESB.

GRESB, importantly, has aligned its standards with important ESG frameworks such as the Global Reporting Initiative (GRI), Sustainable Financial Disclosure Regulation (SFDR), the Sustainable Development Goals (SDGs), Principles of Responsible Investment (PRI) as well as the Carbon Risk Real Estate Monitor (CRREM). GRESB is also aligned with the Taskforce on Climate-Related Financial Disclosures (TCFD) which allows organisations to access the necessary tools and insights to navigate climate challenges and drive sustainable growth.  Recent changes to the 2023 GRESB Standards further enable organisations to monitor net-zero progress and track information on net-zero policies, commitments, and targets for the first time. GRESB has also become the partner of choice for many ESG indices, for example S&P, because of its unparalleled coverage, providing reliable and standardised data to help investors make informed investment decisions, enabling business intelligence, industry engagement and decision-making.

GRESB Scores and the data from which they are built, help investors and other stakeholders understand the relative performance and risk of an asset or a group of assets within a fund or company. GRESB also assists organisations engage with investors and gain access to new capital with favourable lending terms. It also enables companies to get ahead of ESG reporting requirements and disclose in accordance with global ESG Frameworks thus also enabling the benchmarking of ESG performance against peers.

The GRESB Rating is calculated in comparison to the global performance of reporting entities and therefore provides a clear indication of the organisation’s standing on a global scale. The GRESB Rating is determined by the GRESB Score and its position within the quintiles of all participants in the GRESB Assessment, with the model being calibrated annually. Entities in the top quintile receive a GRESB 5 Star rating, acknowledging the organisation as an industry leader, while those in the bottom quintile receive a GRESB 1 Star rating etc. Each year, 20% of entities achieve a GRESB 5 Star rating. The GRESB Foundation has recently published its forward-looking 2024 Roadmap, which reflects upon future priorities of the Standards.

ESG reporting is increasingly becoming a standard practice in the real estate industry as companies recognise its importance in driving transparency, accountability, and long-term value creation. By embracing ESG and associated reporting, real estate companies can enhance their reputation, manage risks effectively, attract investment, and contribute to a more sustainable and equitable future.

References

1. IEA Global Status Report for Buildings and Construction (2020)
2. JLL Global Real Estate Outlook Survey 2023
3. Emerging Trends is Real Estate®: Europe 2024 Survey (joint survey undertaken by PWC and Urban Land Institute)
4. GRESB Real Estate Assessment – GRESB