Our industry is engaged in an important dialogue to improve sustainability through ESG transparency and industry collaboration. This article is a contribution to this larger conversation and does not necessarily reflect GRESB’s position.
In December 2020, CMS hosted two virtual round-table discussions on the topic of “Smart Cities and ESG” with a number of experts from across the real estate and technology industries. These sessions were co-hosted with DigitalDisruption@BREI, a joint venture between Resilience Partners and the Bartlett Real Estate Insitute at UCL to promote data driven real estate. Many of the participants were from real estate companies or funds who have committed to net zero targets. For these companies, the focus on sustainability has become a genuine business driver, as they will need to measure their performance against these targets. Data collection formed a large part of our discussion, both in the context of ESG reporting and benchmarking. We also explored the difficulties they have encountered with this process and opportunities they identified for improvements. This article picks up on some of the issues discussed at that round-table discussion.
Who wants to know about ESG reporting?
The impetus towards ESG reporting and accountability has largely been led by investors. However, reporting is about more than just meeting targets and succeeding on benchmarks. The data collected as part of the ESG reporting process can be used to enhance the customer experience for tenants, making real estate assets more attractive. There are therefore strong economic reasons for collecting data for ESG reporting purposes.
In our recent survey Real Estate Reset (cms.law) CMS asked 1,507 office occupiers across 8 countries whether they would be willing to take a pay cut to work in an environmentally sustainable building. Sixty-five percent of people surveyed said they would. Being able to demonstrate that a particular asset is truly sustainable is therefore in the best interests of a tenant (for the purposes of talent attraction and retention) and is also in the best interests of a landlord wishing to attract tenants.
The role of good landlord-tenant relationships in ESG reporting
When it comes to data collection, most of our participants agreed that monitoring data from landlord controlled areas is relatively easy. However, landlords have often encountered difficulties in collecting data from tenants, either because tenants are reluctant to share it, or, once they have that data, its accuracy and reliability is uncertain. The key theme that came out of this discussion was that positive tenant engagement is crucial when collecting data.
Education around ESG is also important. Landlords can use their ESG reporting data to inform that education piece. However it is equally important to understand natural tenant behaviours and how people actually use buildings. Feedback on lived experience is therefore an important tool, as well as pure data collection. The GRESB Assessment therefore includes questions about tenant engagement programs which include ESG-specific issues.
As a result of the recent Covid-19 experience, landlords and tenants are speaking to each other more than ever before. The group also noted that Covid-19 may have created a shift in how tenants view their premises, focusing more on how to extract the most value and use from them. Again, data analysis and collaboration between landlord and tenant can be key to this.
However, this can be time consuming and the availability of technologies which facilitate engagement with data is important.
Jennifer Linacre, DTZ Investors:
The answer is: through a lot of education and through a lot of tenant liaison; a little working with people to help them understand what the benefits are.
The role of Green Leases
Green leases (requiring data sharing and co-operation on sustainable initiatives) have been around for more than ten years. However, historically tenants have resisted the inclusion of sustainability clauses in leases. Tenants generally view real estate as a cost item and are concerned that agreeing to green lease clauses could result in increased costs for them. This often results in landlords having to accept that they will bear any additional costs, which will reduce short-term profits, while the tenant is likely receive the benefits of any such expenditure actually incurred. This creates a disconnect between who pays and who benefits.
This additional cost is something that long-term investors are likely to accept, as it forms part of the overall sustainability risk analysis for institutional investors. Furthermore, the availability of green loans (containing sustainability requirements), at better rates of interest, may mean other types of may be interested in green leases. Similarly, tenants who accept that there may be some initial increased costs, with longer term benefits may be more willing to accept green lease clauses. Although, as lease terms are becoming shorter and more flexible, it is perhaps less in the tenant’s interest to incur any expenditure on sustainable initiatives or smart technology.
Over the years, more and more tenants are used to seeing sustainability obligations in their leases, but the connection between lease provisions and what actually happens on the ground is not always aligned. Again, this is why our round-table participants agreed that a good landlord-tenant relationship, assisted by technology is vital.
Using ESG reporting data:
Another theme discussed was the use of the data once captured: identifying trends and comparing actual performance year on year, making sensible building management decisions, setting targets for future, years and measuring performance against those targets. Good use of ESG reporting data is required to combat any allegations of green washing.
Furthermore, the quality of the data affects how it can be used. Real time data can be much more useful than historic data for optimising the management and energy efficiency of a building. There are now technologies available which provide and analyse real time data. Looking forward, virtual twins could possibly be used as building passports (both providing information about in-built carbon, but also information about energy use) and AI could also be used to allow buildings to respond to real time data (e.g. predictive maintenance), further reducing costs and improving the tenant/customer experience.
However, using data to encourage good tenant behaviour can be difficult. A tenant may have installed its own plant. A particular tenant may have greater energy usage than another tenant, which could be because of its inefficiencies, or just because of the inherent nature of the tenant’s business. Again, a good landlord-tenant relationship is vital for this to work and you can use ESG reporting data to help you create a brand with positive customer relations.
The round-table participants agreed that the value of open data shouldn’t be underestimated. However, to be worth its weight, the data needs to meet certain verification standards and needs to be relevant for the industry. Using data to influence the future design and/or use of a building and focusing on the outcomes and enjoyment of a building, rather than the information or technology behind collecting that data will have positive outcomes for occupiers. If tenants are able to see the benefits (for example, lower energy bills) they are more likely to engage with a landlord in either providing that information, or allowing the use of the landlord’s technology to collect that information. In fact, in some cases, as noted from our survey mentioned above, it is the occupiers who are driving this. The round-table noted that tenants are themselves becoming more digitally enabled and using this to drive productivity. Working with tenants towards their own business goals will benefit the landlord’s business, as well as the tenant’s.
The role of technology in ESG Reporting:
Appropriate use of technology was identified as a tool that can assist in many aspects of ESG reporting: landlord-tenant engagement; meaningful and useful analysis of data; and nudging positive behaviours in the use of buildings.
Technologies themselves, of course, come at a cost. If they are used for the benefit of a landlord’s ESG reporting, the argument would be that this is a landlord cost, not to be charged to tenants. However, if technologies are not just used for the pure ESG reporting work, but are also used to inform decision making processes, is there any argument that the tenants are actually receiving the benefit of the data collected?
The amount of data being collected is vast and the environmental impact of data centres needs to be considered. Collecting data for the sake of data is not a sustainable position. There was genuine agreement that actual performance is more important than scoring highly on benchmarks or accreditations.
What’s next for ESG data?
Many of our participants agreed that, in terms of ESG data collection, we are just at the beginning. There are so many opportunities for the real estate sector.
Collecting data on an asset level basis and collaborating with other land owners will mean that eventually we can use data relating to a whole city or country to inform decisions about future developments and investment into infrastructure. In order to achieve this, the industry has to work towards the same goals. Data collection and sharing are key to this. Moving towards structured data, which can be read by machines will help, but to achieve it, the technology must be interoperable. The real estate sector can learn from other sectors (such as on-line retailers), who are further ahead in digitisation.
Simon Pursey, Coltham Asset Management:
There needs to be a lot more collaboration, both from private and public sector to try to define what it is we should be focusing on….As you start to get the data, it can improve your decision-making.
If you want to hear more, listen to some sound clips from our round-table discussions.
This article was written by Cheryl Gurnham, Partner at CMS