January 2016 – Over 70 of the U.S. real estate industry’s sustainability leaders gathered at NAREIT’s 2016 Leader in the Light Forum, an annual gathering designed to help progress the real estate industry best practices. As the packed agenda unfolded, attendees received advance knowledge into Bloomberg’s efforts to enrich ESG data and analytical offerings for REITs and green bonds on the always improving Bloomberg Terminal, a briefing on SASB’s forthcoming voluntary disclosures on financial materiality for U.S listed real estate companies, and updates from AccountAbility on the continued development of the NAREIT Leading Practices ToolKit project that kicked off in October 2015.
The 2-day forum was headlined by the investor panel where REIT securities portfolio managers Hans Op ‘t Veld, Head of Listed Real Estate for PGGM -- a $200 billion Dutch institutional investor -- and John Robertson, Global Head of Real Estate and Infrastructure Securities for Deutsche Asset Management discussed how ESG metrics are transitioning from ‘informal’ information to becoming an important metric within the larger mosaic of indicators used to inform management team quality, discount rate assumptions, and future growth prospects when analyzing buy/hold/sell investment decisions with REIT securities.
During this hour-long investor-driven discussion moderated by David Stanford, Executive Managing Director at RealFoundations, an interesting dichotomy emerged. European institutional investors more often take the long view by actively seeking to do well economically and do good societally with their investments through the use of ESG attributes, whereas many US-based investors typically maintain more of a ‘trader’ mentality thus actively using ESG metrics on a limited basis, primarily to manage downside risk.
Op ‘t Veld explained how PGGM intertwines ESG concepts into 1) the investment analysis of a single portfolio company’s long-term license to operate, and 2) within PGGMs larger portfolio risk analysis including investment underwriting and ongoing company engagement with securities investments as well as with its broader $22.7 billion private equity real estate portfolio. PGGM’s conviction is that financial and societal returns go hand in hand, and they pay keen attention to macro issues including their view of the COP21 climate agreement impacts coupled with their desire to pursue increased infrastructure investments while incorporating ESG indicators.
Robertson offered his view that corporate governance is key to assessing downside risk, social indicators on employee turnover and diversity are somewhat esoteric, and that his portfolio strategy was to address environmental risk via fundamental asset-specific analysis using primary research on occupancy and rental rates. After some semi-serious joking about proprietary investment strategies, both portfolio managers agreed that GRESB has progressed the industry by putting forward a framework that drives engagement at all points of the investment cycle, and that GRESB is most relevant when making risk-based adjustments to forward discount rates used to value a REIT.
PGGM described how they use GRESB data to gain a better understanding of the risks and opportunities inherent to their investments including successful efforts to map the CO2 emissions from their real estate portfolio. In 2015, PGGM also analyzed California’s water problems beyond the obvious drought conditions to incorporate challenges with market pricing signals, water rights accounting techniques, and regulatory rules. Their analysis concluded that California is faced with a systemic risk of ongoing water shortages and they are actively working this data into their forward risk models.
NAREIT bills the Leader in the Light forum as “a collaborative workshop that provides NAREIT corporate members the opportunity to take an active role in advancing sustainability leadership for REITs.” The 2014 Trend Analysis tabulated by RealFoundations finds that NAREIT members who participate in Leader in the Light invest significantly more capital in energy efficiency projects than other REITs, and report strong ROI’s from these portfolio upgrades.
GRESB plays a leading role in NAREIT’s sustainability efforts through its annual GRESB Leader in the Light Supplement used in addition to a company’s annual GRESB scorecard to recognize leading property sector leaders. Winners from the 2015 competition are among the top real estate companies in North America and demonstrate superior, sustained leadership on sustainability best practices.
Chris Pyke, GRESB COO, provided a spirited overview of GRESB’s 2015 aggregated results, then focused the audience forward on the 2016 GRESB Real Estate Assessment evolution including a description of the GRESB Health and Well-being Module and the forthcoming GRESB Developer Assessment. He also provided insights into the initial GRESB Debt Assessment released in 2015 and detailed the pending launch of the GRESB Infrastructure Assessment.
Cliff Majersik, Executive Director of the Institute for Market Transformation, provided a regulatory update covering the continued advance of energy disclosure laws in municipalities across the United States and provided an updated U.S. Commercial Building Policy Comparison Matrix describing specific policy elements applicable to commercial building owners.
With over 50% of the market-cap weighted FTSE NAREIT Index constituents participating in last year’s GRESB assessment, 2016 portends the continued uptake of ESG policies and management practices industry-wide, and stronger progress by REITs to implement and measure sustainability-related results.
Based on the tone and tenor throughout the forum, one gained an acute sense of the strong competition for the coveted Leader in the Light Award. Although early in the year, each attendee has their work cut out for them as they return to their companies as “emissaries of ideas and ambition” armed with the desire to achieve greater sustainability improvements in the year ahead and be recognized as the 2016 NAREIT Leader in the Light.