Weekly Briefing

ESG: If It Matters, Measure It

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In commercial real estate, the financial performance of an investment is measured extensively, starting at underwriting through regular intervals during the hold period, capital events and at sale. As ESG frameworks are more universally applied to CRE, the definition of investment performance is broadening to include additional metrics. This expanded definition of investment performance is shifting the industry from “setting standards” to “reporting results.” Investors, stakeholders, customers, neighbors, and regulators are asking how real estate is contributing as a net positive in its role as a financial instrument, built structure and community member.

Targeted regulatory pressures are also moving the industry from voluntary to mandatory reporting, including penalty avoidance. The U.S. Securities and Exchange Commission (SEC) recently released a proposed rule that requires SEC-registered entity disclosures to include climate-related risks. In the U.S., cities, counties and states are leading the way with legislation to address meeting climate goals through regulation requiring decarbonization at the building level. For assets that do not meet property-level performance standards, there are meaningful financial penalties that go along with a publicly available failing grade.

In this article, we will highlight navigation markers for real estate owners to consider when outlining ESG+R-informed investment performance metrics as the real estate industry navigates these choppy waters.

ESG: What are we talking about here?

The term ESG is used in various contexts layered with many subtexts. For this discussion, ESG is defined as an investment framework applied to CRE and the built environment to achieve strong risk-adjusted returns paired with positive societal impact.

These criteria are applied at all levels across the CRE industry, from corporate to portfolio to building operations based on the following interconnected pillars of Environment, Social, Governance, and Resilience (ESG+R):

Environmental – performance as a steward of nature with a focus on environmental sustainability and the fair and efficient use of resources.


Social – management of relationships with employees, suppliers, customers, and across impacted communities.


Governance – transparency and accountability including diversity, executive pay, audits and internal controls, tax strategy, political activity, and shareholder rights, along with ESG systems.


Resilience – capacity to identify, address, mitigate, and respond to risks and opportunities.

At its core, ESG+R is about creating long-term value for investors and society through managing risk, building resilience and providing transparency with accountability. The application of ESG+R principles to real estate investments has spread deeply and broadly across the real estate industry over the last three years. Many investors and stakeholders now use ESG+R fundamentals as gating criteria for investment, policy and business decisions.

Ready. Set. Goals

For owners that are at the beginning of the ESG+R journey, now is the time to start. Yes, different companies are at various places on the ESG+R learning and implementation curve. Own your place on the curve and plot the course forward.

As with any new investment in business, you begin with a business plan. Apply that same discipline to the adoption of an ESG+R framework in your company and real estate investments: set out the investment thesis and projected results, outline the strategy, develop the tactics, resource and execute the plan, adjust based on real time experience, iterate, and report the results.

Use the strategic planning process to set the goals by which your performance will be measured. Take the time (and since this is real estate, hire the experts) to outline the underlying tenets and culture of your organization and use that to build out goals that improve the organization and the investment performance along with society. To maintain course, for each goal and the accompanying metrics ask the question, “What does success look like and how will it be defined?”

Measuring Tape

The CRE industry is still determining the common metrics to use as standard measurements of ESG+R performance. We will know we have arrived when ESG+R metrics include the equivalent of an NOI (net operating income). Until then, organizations can report metrics that make the most sense for their business needs along with reporting the coalescing industry-standard metrics, all while providing accountability and transparency to stakeholders.

Identifying where goals and accompanying results integrate across the four interconnected pillars of ESG+R provides the opportunity to differentiate from competitors and create additional value. Consider the Waste Diversion result reported by an institutional investor: “37% waste diversion rate away from landfill for entire portfolio through recycling, waste-to energy, and reuse. By achieving this goal, this real estate portfolio delivered positive results across the E, S, G and R pillars. While not all goals and results need to be multi-dimensional to be meaningful, the more integration the better.

For large-scale, long-term goals, such as net zero carbon targets, it is critical to select metrics that provide visibility into near term and incremental progress. Since the progression may not be linear, metrics that are multi-dimensional with gating milestones are more valuable than set percentages and dates.

Report cards

It is important to talk about reporting when talking about metrics. Along with the existing regulatory and accounting reporting requirements, including the SEC and local regulators as noted earlier, investors and stakeholders rely on external reporting vehicles to evaluate investment ESG+R performance. Owners have an embarrassment of riches of third-party reporting frameworks to choose from today.

When evaluating the reporting framework options, it is useful to look through the lens of varied stakeholders – investors, competitors, industry analysts, customers, regulators – to identify the best path for the target audience. For much of the CRE investment portfolios in the U.S., the reporting vehicle is currently GRESB.

Similar to the accounting statements outlining the investment’s financial results, most ESG+R reports are reporting on the past. The GRESB report is akin to the balance sheet – it is a snapshot at an historical point in time of the assets and liabilities. Which begs the question, is past performance indicative of future performance? No, but transparency and accountability engender more certainty.

Data

Yes, data is a loaded word. There is so much chatter in the industry about monetizing, accessing, storing visualizing data and so on. For many owners, they have either too little or too much data, hampering their ability to make informed decisions with actionable information.

When determining which data is essential, find the North Star by asking, “What does success look like and how will it be defined?” to underscore the goals and metrics. Once the required data is identified, then the work is to collect, own and organize it in order to support the current metric tracking, feed multiple reporting frameworks and be available for future analysis.

Toolbox

Another excel spreadsheet is not going to get us there. We’re gonna need a bigger boat.

Technology is an important part of the solution to deliver investment performance and positive societal impact. Across the CRE industry, technology is changing the game by building resilient energy grids, improving workplace productivity and scaling construction with modular robots. Owners who reframe investments in technology as a value creation tool, rather than an expense, have the wind at their backs.

The best long-term results are achieved by owners who approach technology as an integrated solution. By incorporating and integrating technology into and across systems, rather than just bolting it on, they achieve their goals, uncover second order benefits and deliver better results.

The Proof is in the Pudding

No longer will the list of ingredients and shiny pictures satisfy the investors and stakeholders who are demanding results. Metrics are how the CRE industry can show those results.

In this rapidly shifting market, owners who look at ESG+R and reporting metrics as the opportunity to create value will win the race to raise capital, lease space, hire talent and deliver strong investment performance while positively impacting society.

With the convergence of increased adoption of ESG+R frameworks across the CRE industry, improving and emerging technology solutions, standardization of reporting vehicles and the evolution of metrics, the best is yet to come for forward-looking owners.

Learn more about ESG for CRE from thought leaders like Mandi Wedin and others at Realcomm | IBcon on June 15-16 in Orlando. Register today and join us for these events and more!

Mandi Wedin, Founder & CEO, Feroce Real Estate Advisors With 20+ years of experience running multi-billion-dollar real estate portfolios, Mandi Wedin delivers results by leading change and creating value out of change. As Founder and CEO at Feroce Real Estate Advisors, Mandi advises forward-thinking real estate companies on positioning their real estate and teams to succeed during times of disruption. Feroce works with clients to chart the path forward through the shifting landscape of commercial real estate, technology, and consumer demographics.

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