The Property Chronicle | Shining light on ESG reporting in real assets
This article originally appeared in Property Chronicle on 30 June 2021.
The requirement for transparency in real asset reporting has ramped up significantly in the past year. Governments, investors and occupiers are asking for more data to help determine a building’s ESG performance. Crucially, this data impacts the valuations of assets, their attractiveness in the market and their ability to access green loans.
Historically, one of the most marketable features of a green building has been its building rating, such as a BREEAM rating or an EPC. However, with modern smart metering, recovering data on actual performance has become easier and the focus on carbon greater.
“When investing in real estate assets, understanding the underlying quality of the building and how it runs is important”
When investing in real estate assets, understanding the underlying quality of the building and how it runs is important. While the building performance data can be challenging to obtain, the insight provided is more granular and valuable than aggregated data at a portfolio or fund level.
In 2016, Carbon Intelligence started a smart-building programme with Aviva Investors, which has saved over £2m to date. Strong energy performance also typically leads to improved maintenance, reduced life-cycle costs and lower service charges. Long term, all these benefits will lead to improved IRR. A review of a portfolio with £2b AUM highlighted that they would save £15m a year if they aligned their energy performance with the UK-GBC net-zero pathway.
Another challenge facing the nation is that the amount of green energy is limited; for this reason, transparent performance needs to show both figures, typically energy intensity, so it can be compared against other similar buildings, and absolute carbon emissions. This will show the environmental impact of energy used by the building.
For real estate investors, it is more straightforward to track the performance of offices and shopping centres through tools or benchmarks such as the Real Estate Environmental Benchmark, Carbon Risk Real Estate Monitor (CRREM), or via research from the British Council for Offices (BCO), and the UK-Green Building Council (UK-GBC). The Global Real Estate Sustainability Benchmark (GRESB) has played an essential role in improving the transparency of ESG reporting. The challenge is that the GRESB scorecards do not display asset ESG performance. GRESB and other European partners produced the Carbon Risk Real Estate Monitor (CRREM); CRREM helps track the carbon intensity of specific assets and track an indicative stranding date, though it is only as valuable as the data that is obtained and input.
As the UK becomes more focused on the legislated target of net-zero by 2050, inaction could lead to building obsolescence. Increasing the transparency of these risks on individual assets will help investors make clearer decisions on what will maintain or increase in value through transition.
Between 70-80% of buildings in-use in 2050 have already been built today, however, only a handful of buildings that exist are designed to address climate change risks, and fewer still are performing in line with net zero. Therefore, almost all buildings have a high risk of obsolescence in the shift to a zero-carbon economy. We need to focus on how we can transparently report on an asset-by-asset basis because by 2050 all buildings will need to be net zero, and that date is only one to two refurbishment cycles away. Over the next five years, we will have a much better understanding of the quantity of future-proofed buildings or assets likely to be stranded.
The largest asset managers and asset owners are driving significant momentum in the market. By improving the transparency of how you report your ESG performance, you can move ahead of your peers in demonstrating to investors, occupiers, local governments, or the public that you have a plan. You do not need to try and replicate the market leaders, but it may be worth reviewing the approaches that would work for your company, portfolio, or asset. Even if you decide not to be transparent in your reporting, you will not have a choice, as legislation forces your hand.
The direction of travel highlights the benefits of transparency at an asset level rather than a portfolio. This granularity makes it more possible to improve the ESG performance of buildings by utilising operational data. We recommend aligning your asset level reporting with credible frameworks such as the World Green Building Council advancing net zero commitment across operational and embodied carbon.
IPSX, the new property stock exchange, has a unique role within the context of net zero, as the assets traded on IPSX can provide clearer market signals as buildings work through transition. Assets with transparent ESG metrics and a plan for managing physical and transition risks can attract and retain investment through the transition to net zero, aligning investment performance with environmental performance.
If you would like to learn more about ESG reporting please visit the Carbon Intelligence website at www.carbon.ci and for more details about the first stock exchange for real estate, please visit www.ipsx.com