Digitisation & ESG: The Path to Sustainable Investment

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June 19, 2023

As ESG regulation continues to grow in importance across many industries, the demand for better ESG-related data collection and reporting practices is growing too. The topic is getting more and more attention, but questions remain: What data is needed? How can digital tools help make reporting more transparent? How can digitising ESG data collection accelerate transactions and deals? All these questions and more were discussed during our recent panel at UKREiiF, moderated by Petter Made, SVP Product & Development at Drooms.

Below we’ve summarised the key insights from our experts: Emma Hoskyn, UK Head of Sustainability at JLL, Jessica Pilz, Head of ESG at Fiera Real Estate, Ailsa Shaylor, Head of ESG & Sustainability at BNP Paribas and Jonathan Walker, Associate Director, Sustainable Investment at Gresham House.

What impact do ESG considerations have on the valuation of real estate assets & how can this be measured?

Why is measuring ESG so important for real estate assets? This is a question that often gets raised in the industry, even more so by ESG sceptics. The notion that ‘ESG is fad that will go away’ no longer has any viability. As Jonathan Walker, Associate Director Sustainable Investment at Gresham House phrased it “ESG has gone from a nice-to-have to a license to operate. ESG factors are increasingly becoming as important as financial ones.”

By implementing ESG initiatives, companies profit from a range of immediate and long-term benefits, including improving their brand reputation, attracting new business, regulatory compliance, and the increased long-term profitability of their assets. Non-compliance also comes with significant consequences. Real estate is among the world’s worst climate polluters, driving nearly 39% of global carbon dioxide emissions. Assets that do not comply with ESG regulations may be classified as “brown assets”. These are assets with poor environmental performance and are priced with an associated “brown discount”. This discount refers to the higher operating and maintenance costs as well as future weaker rents and capital values of these unsustainable assets. As Jonathan Walker stated: “Improving the environmental criteria of assets leads to lower operating costs as well as resilience to climate risks. This in turn results in a greater demand, higher occupancy rates, and ultimately higher rental income.”

A recent study by JLL analysed close to 600 office investment transactions in Central London in a five-year period and found that the market is increasingly attaching higher prices to assets that are more sustainable. This trend has led to more improvements being made to the environmental performance of London’s office stock, as sustainable buildings drive greater interest due to reduced operating and energy costs. Buildings that have high sustainability credentials will therefore lease for premium rents and sell for premium yields. Emma Hoskyn, UK Head of Sustainability at JLL added: “In terms of leasing velocity, schemes that target higher BREEAM ratings show a higher pace of leasing, with our analysis revealing that buildings rated as ‘Outstanding’ or ‘Excellent’ have an average void rate of 9% 24 months post-completion, compared to 16% for ‘Very Good’ rated buildings.”

For an asset to become ESG compliant, it’s vital to measure and report on its ESG performance. “Data plays such an important role in helping us understand what we’re actually dealing with, because if we don’t have the data, we don’t know how far we need to go in order to improve,” said Jessica Pilz, Head of ESG at Fiera Real Estate. Measuring ESG data allows firms to understand base case targets and improve performance, for example by meeting carbon reduction commitments. “Data also helps firms evaluate the effectiveness and impact of certain measures and initiatives,” continued Jessica Pilz. This data allows a measurement of progress over time and whether companies are achieving their targets. This in turn creates transparency between investors and asset managers. As Emma Hoskyn summarised quite fittingly: “What you don’t measure, you can’t manage.”

How can commercial real estate companies ensure that they are meeting ESG requirements?

The crucial first step is dedicating the necessary resources, followed by a clearly defined ESG strategy. Ownership should also be allocated, for example by appointing internal or external ESG experts. However, as Jessica Pilz mentioned, “The ESG strategy should not solely be the ESG experts’ responsibility – it needs to be integrated into the organisation, so that everyone understands how their role affects meeting targets and requirements.” Companies also need to define what the targets are and in what reporting frameworks their respective progress will be measured.

This is also where the ‘G’ in ESG comes into play – “Governance is where it all starts, you need to have good governance to ensure you comply,” continued Jessica Pilz. It is therefore key to not only delegate ESG-related tasks, but also ensure that everyone in the organisation understands their purpose is accountable.

Transparent, detailed, and regular reporting is crucial. Data sharing as well as regular legislation reviews should be encouraged, so that progress can be tracked and measured against legal requirements.

What are some of the most important ESG metrics that you should be tracking, and why?  

Environmental aspects receive the most focus when it comes to real estate assets. As Jessica Pilz, stated during the panel, “We’ve always been focused on the ‘E’ because it’s easy to measure”. Environmental metrics that should be measured include energy use and efficiency, carbon emissions, water use, waste. These are all data points we have collected in the past, but new areas such as nature and biodiversity are gaining increased attention. Biodiversity has previously lived in the shadows of the decarbonisation discussion but in actual fact, we cannot decarbonise unless we restore the natural world. Fiera Real Estate, for example, is focussing on using natural capital to support the decarbonisation pathway. But as it’s such a new area, it’s very difficult to measure offsetting, for example soil carbon sequestration as a way of removing carbon from the environment. The Taskforce for Nature-related Financial Disclosure (TNFD) was established to help develop a framework for this.

It’s easy to forget about the ‘S’ in ESG, and how it can be monitored, when it comes to real estate assets, but it is an area that is becoming more prevalent to investors. Jessical Pilz believes: “Social Impact and Social Value are highly important in ESG but it’s important to note that they are very different”.

Social Impact is the impact a real estate project has on individuals, communities, and society. For example, will it bring affordable housing or job creation? Will there be spaces for community engagement and easy access to amenities? Will there be green spaces for the improving the wellbeing of residents?

Social Value is the inherent worth that a real estate project brings to society. Will it bring community cohesion? Will it promote health and wellbeing with amenities? Will it preserve cultural heritage as well as promote diversity and inclusivity?

When it comes to measurement, you can consider the following:

  • Number of jobs generated
  • Percentage of affordable housing created
  • Number of community meetings to discuss the project
  • How community feedback affected the project
  • Provision of public spaces
  • Wellbeing surveys of residents
  • Number of apprenticeships

What are the biggest challenges to collecting accurate and reliable ESG data?

One of the biggest challenges is actually getting your hands on the data. Especially when it comes to long income assets that are single let, it can be very challenging to collect the data. The metering can often be archaic, for example water meters that are underground and impossible to find. Tenants also often don’t want to share the data.

As Jessica Pilz mentioned “Fiera Real Estate are proud to share that we now have 90% of the data for our long income portfolio. We did this by building relationships with our tenants and data scraping. Our tenants consent to collaborating with utility providers and we can scrap the data from their portals.” Ailsa Shaylor shared a similar view: “Collecting data is hard, especially water which is a no-go. But there are tech solutions out there to help you – there are almost too many solutions. You also need to think about frameworks that you imbed in tenant contracts and data sharing in leases.”

You also need to take regulation into consideration such as Sustainability Disclosure Requirements (SDR), Sustainable Finance Disclosure Regulation (SFDR) and Taskforce on Climate-related Financial Disclosures (TCFD). As Jonathan Walker stated “You might not get all 14 points of the SFDR, but you are confident with the 5 that you do have. Be open and honest about that and see where you need to improve.”

Another challenge is defining who is responsible for collecting, sharing, and reporting on the data. “For example, energy suppliers collect and store the data and then pass them on to 3rd parties. The resulting question: Who actually owns the responsibility for accurate data? The energy supplier, the metering company, the data aggregator, the property manager, or the energy consultant?” continued Emma Hoskyn. Ailsa Shaylor, Head of ESG & Sustainability at BNP Paribas added: “There are a number of challenges with accurate ESG data collection, but honesty and transparency for everyone involved to say ‘this is the data we do have’ is a culture that hopefully continues to grow in the industry.”

How can technology improve ESG measurement and reporting?

There are two categories of ESG technology: One is the technology that can go inside the building. An interesting analogy was presented by Emma Hoskyn stating that “a building is part of a breathing, living system. If we don’t constantly monitor it, it becomes inefficient and doesn’t meet the occupiers needs. Technology is aimed at responding to the living building to keep it operating efficiently.” For example, technologies that can help monitor environmental data include equipment and sensors that improve building performance (temperature, CO2, occupancy, housekeeping, etc.).

The other is the technology used to analyse and visualise the data provided by the equipment in the building, to identify issues and trends as well as influence decision-making. The gathered insights must be accessible and easily understandable to fund managers, investment managers, asset managers, property managers, facility managers and sustainability managers. This is where data platforms such as Drooms offer an ideal solution to collate, analyse and store ESG data. The data can be gathered over time, shared with relevant stakeholders and easily accessed for reporting.

However, when it comes to tech solutions what should the smaller investors that don’t have the innovation budget to spend do? According to Emma Hoskyn “Sometimes you need to also accept that you won’t be able to find all the data. But that shouldn’t paralyse you in making decisions.” You need to be realistic about what you can achieve and what you want to improve. What data is most relevant to your funds and divisions?

How can ESG ratings and benchmarks help investors assess the sustainability of assets? And how do you choose the right one?

When it comes to ESG, a new rating or framework seems to every day, and it can become a minefield to navigate. How do you know which ones are the right ones to benchmark against? Who is vetting the ratings agencies?

As Jonathan Walker stated: “I used to work as a research analyst, so I know what goes into these and what is missed. 60% of ETF products use MSCI ESG scores. I’m sceptical about the long-term impact of these ratings. For an investor, I think they are useful for comparison when looking at assets and if you are just focussing on the governance metrics or social metrics. But taking them holistically is no substitute for proper ESG due diligence and analysis of an asset.”

Frameworks have been a great way to push the conversation forward and to put ESG firmly on the agenda, but many of them have not kept up with the market.  Jessica Pilz added “They should not be a measure of your success and they do not accurately measure the impact of your ESG changes. You should focus on real change rather than on rating. Many of our investors do not get what they need from GRESB reports, which is why we are creating bespoke ESG reports for them, so they have the data to respond to TCFD or SFDR.”

So, have GRESB and BREEAM had their day? They are still very important for educating the uneducated. It gives those that have not even started on their ESG journey an idea of what good looks like. They also help to offer validation. As Emma Hoskyn believes “Many investors and asset owners are scared of greenwashing. These ratings offer an external verification that it’s not just the company claiming they are making changes. But are they really going to deliver what is needed or wanted by the tenants? Probably not.”

So, how do you get started with ESG data collection?

ESG should not be viewed as a silo – as aforementioned it needs to be fully integrated into the company culture. All speakers agreed that the most important thing is to just get the ball rolling and start. According to Alisa Shaylor a great starting point is to review your current data and measure it against ESG regulations. This allows companies to see what data is already being measured and what’s missing and align this with their business and investment strategy.

Sustainability and ESG reporting is easier now than it has ever been before. Previously, it was impossible to gather the relevant data, but now involved parties are increasingly becoming engaged and willing to share. Collaboration is also key: Speak to your peers in the industry and look at what others have done, and how.

To watch the full panel discussion, please see here:

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