Increasing allocations of capital to the real estate and infrastructure asset classes and intensifying climate-related threats to those assets have been hallmarks of the ten years since GRESB, the global benchmark for the environmental, social and governance (ESG) performance of portfolios, was launched. Robust growth in participation — from the initial three European-based pension funds to today’s 1,005 real estate entities, including funds, private companies and REITs, collectively holding more than 100,000 assets in 64 countries — similarly coincides with emerging priorities for risk management and burgeoning capacity to collect and interpret data.
“I’m certainly seeing an ESG tailwind in the industry now,” Michael Brooks, chief executive officer of REALPAC and a member of the GRESB board of directors, told attendees at the 2019 GRESB real estate results presentation in Toronto last week.
Sustainability and resilience practitioners, on hand to provide some context alongside the number-crunching, linked the uplift to business imperatives and inherent vulnerabilities. Portfolio managers can prepare for extreme and volatile weather, but they can’t evade many of its resulting hazards.
“We know physical risk is a key risk to our real assets,” said Derek Billsman, director of real estate management and sustainability with the Healthcare of Ontario Pension Plan (HOOPP). “You can’t move that building.”
“When you look at the money at risk there, that’s a big issue,” concurred Darryl Neate, director of sustainability with Oxford Properties Group.
Others noted the challenge of discerning a path forward through a dense maze of analytics.
“Over the past 10 years, the ability to acquire data has improved vastly. People’s capacity to absorb data has sort of shot down,” mused Hugh Molyneux, president of Refined Data Solutions, a GRESB partner firm providing professional services to the real estate sector. “It’s really about getting the right data to the right people at the right time. GRESB has been instrumental in marshalling us and guiding us to prepare that data.”
This year’s results, released earlier this month, continue to find Canada near the front of an increasingly competitive pack. Together, 26 real estate portfolios achieved an average score of 76.6, surpassing both the Americas average of 72.1 and global average of 72, but off the pace of Australia/New Zealand’s chart-topping 80.9 average score. Europe, home to the largest number of participating portfolios, trailed the field with an average score of 70.7 — a tally that still exceeds last year’s global average of 68.4.
Major Canadian players figure among both GRESB investor members with full access to the data — including Alberta Investment Management Corporation (AIMCo), HOOPP, Ivanhoé Cambridge, Ontario Teachers’ Pension Plan, Oxford Properties Group and Presima — and the larger complement of management members that report and are benchmarked through the real estate assessment. For the latter group, the acknowledged arduous task informs their own decision-making and positions them to meet investors’ expectations.
“The investor community is asking us for our GRESB scores now,” reported Regan Smith, director of sustainability with Manulife Investment Management. “Whereas, I don’t think they were asking at all about ESG ten years ago.”
Alignments and aspirations chart a course to the mainstream
GRESB is also aligned with other obligations that companies and their investors may face, such as tracking commitment to the U.N. Sustainable Development Goals or reporting under the Task Force on Climate-related Financial Disclosures (TCFD). The 96 per cent jump in voluntary participation in the pilot resilience module suggests that investors are paying attention to and grappling with TCFD’s nascent framework for assessing potential impacts of climate change on business stability and value. In this second of a three-year development period, 316 entities opted to report, as GRESB administrators tweaked the module to glean focused responses about transition, social and physical risks.
“There were 150 distinct things in the module you can measure, and they were categorized by TCFD criteria,” explained Chris Pyke, a senior vice president with the GRESB and USGBC affiliated firm, ArcSkoru. As of 2021, the most pertinent indicators will be identified and integrated into the core GRESB assessment.
“If you do GRESB, you have all the data you need to navigate these other acronyms,” said Dan Winters, GRESB’s head for the Americas. “We have institutional investors that rely on us to get that data.”
For now, the alignments are perhaps more aspirational than tangible. For example, 80 per cent of GRESB participants have set targets for achieving the UN Sustainable Development Goals (SDGs) deemed most applicable to real estate, but efforts have been modest in the face of the actual objectives.
“Even if everyone in the ESG universe met their targets, we still wouldn’t meet the SDGs,” advised Neil Pegram, GRESB director for the Americas.
Pyke likewise affirmed there is much room for improvement on the TCFD front, which is seen in the significant divergence in responses to the pilot resilience module.
“The top 10 per cent of respondents have a very comprehensive program. The bottom 10 to 20 per cent is really just starting out. In between, there is a lot of variance,” he said. “You can’t assume that people are managing climate risk and resilience successfully. You might call it random acts of resilience.”
Nevertheless, the green building movement has not been slow to adopt new concepts and approaches. GRESB, itself, embodies a fairly recent evolution to big-picture, portfolio-wide thinking. Smith pointed to her own earlier career role in consulting as an illustration.
“A lot of the work we were doing was really helping owners with individual assets. Certifications were just identified (as something to pursue) on a market-by-market needs basis,” she recounted.
Similarly, Darryl Neate was one the first real estate executives with the job title of sustainability manager when Oxford Properties hired him in the same era. His task began with a GRESB-attuned exercise to compile data and identify baseline starting points.
“Many of our organizations have full departments that are managing financial data and they’ve been doing that for a hundred years. We were at very, very early stages,” he recalled. “Even now, data is fragmented. It’s difficult to obtain. It’s hard to patch together across portfolios.”
Guidance to make buildings better
Again this year, GRESB participants reported in seven variously weighted ESG aspects — management; policy and disclosure; risk and opportunity assessment; environmental monitoring/management; performance indicators, including energy and water consumption and waste diversion; building certifications; and stakeholder engagement — that create a picture of their strategy-level environmental commitment and oversight, implementation rigour and measurable outcomes.
While some scores, particularly for the management and policy aspects of ESG, are extrapolated over a portfolio, performance indicators are drawn from asset-level reporting. Notably, energy intensity is plotted from a pool of nearly 23,000 assets with 100 per cent data coverage. “That is really high-calibre data,” Pegram observed.
This year, performance data revealed a slight 0.2 per cent increase in energy consumption globally, counterbalanced with a 2.6 per cent drop in greenhouse gas emissions and a 0.1 per cent decline in water consumption. Looking at another asset-level measurement, the global average score for building certifications continues to be the lowest of the seven aspects, but is steadily improving.
“LEED, Energy Star, BOMA BEST — they are certifications that really give guidance on how to make buildings better, and I think that’s showing up in the (overall) numbers,” Winters maintained.
Fewer assets contribute to Australia/New Zealand’s leading score — 2,107 valued at USD $242 billion — than in the Americas, where 38,274 assets valued at USD $1.75 trillion, or Europe, where 53,015 assets valued at USD $1.19 trillion, underpin the averages. Canadian GRESB participants skew heavily to private real estate — 21 of 26 entities — and reflect pension fund clout in the market. As in the U.S., Pegram noted that their portfolios tend to be larger than those in other global regions.
Among noteworthy 2019 results, first-time participants attained the highest ever entry-level average score, at 58. (By comparison, the global average score was 47 just five years ago.) Meanwhile the 42 entities that have been reporting since 2011 pushed their average score to 84, up from 80 in 2018.
Canadian organizations figure in both groups: Concert Properties as a newbie; and BentallGreenOak (formerly Bentall Kennedy) and Oxford Properties Group anchoring the old-hands. Another six are in their newly exposed sophomore year when investor members gain access to their results. All five listed companies — Artis, Choice Properties, First Capital, Killam and RioCan — have joined since 2017.
Barbara Carss is editor-in-chief of Canadian Property Management.