How to Meet Investor Demands as ESG Scrutiny Intensifies
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. Please refer to official GRESB documents for assessment related guidance.
ESG is under a microscope—and rightfully so. S&P Global states that sustainable bond issuance, including green, social, sustainability, and sustainability-linked bonds, could now collectively exceed $1 trillion. However, with more money comes more responsibility as companies face increasing pressure to back up their sustainability claims with hard data.
This may be a reality check for some organizations, but it’s a necessary shift for the environment and for eco-conscious consumers. In just the past two years, several major brands have been investigated for overstating the sustainability of their products. Fast fashion retailer H&M, for example, was called out in a 2021 report by the Changing Markets Foundation, which found that 60% of the company’s sustainability claims are misleading. Furniture giant IKEA came under fire in 2020 when some of its products were linked with illegal logging in Ukraine. This came a year after the company built what it claimed to be its “most sustainable store yet,” on the site of another sustainable store that was demolished after just 17 years of use.
What does the uptick in greenwashing sensitivity mean for commercial real estate, an industry responsible for roughly 40% of the world’s carbon emissions? It means that on top of taking more ambitious steps toward decarbonization, real estate firms will be expected to provide substantial evidence that they are making incremental progress toward ESG goals, and that they are aware of and acting upon the sustainability-related risks that affect their portfolios.
Capital markets participants are also facing increasing pressure to remain accountable under new regulatory frameworks emerging worldwide. Investors need data that is accurate, timely, and flexible enough to meet their evolving needs.
Data quality is paramount
ESG reporting has evolved quickly over a short period of time, and the discussion has pivoted to data quality. Simply reporting whatever ESG data a firm has on hand is no longer sufficient. Companies need to be transparent and intentional about the integrity and consistency of their data. Stakeholders are no longer asking “Do you have ESG data available?” but “How did you collect it?” and moreover, “Why should we trust it?” So what defines quality data? With ESG data becoming comparable to financial data, the criteria is notably similar to the principles that guide credit ratings agencies: The information must be accurate, timely, complete, and auditable.
ESG data that meets all of these requirements across an entire real estate portfolio is difficult to collect manually. For example, tracking a building’s energy consumption requires pulling from utility bills on a monthly basis. And energy is rarely a single line item, as CRE assets can be powered by a number of sources including renewable ones like solar, hydro, and wind.
In a recent survey of real estate leaders, 36% reported that they still use manual processes to collect environmental data, while 11% rely on consultants to track and store the data for them—which could result in data that is inaccessible or incomplete. Fortunately, firms that take a tech-forward approach to ESG can easily gain a competitive advantage by improving their data accuracy and coverage.
For example, there are still many companies and consultancies that rely on manual data collection processes, such as entering utility bill data into Excel spreadsheets to track sustainability data and perform calculations. But automating this process removes human error from the equation while saving valuable time and resources. Tools that apply artificial intelligence and machine learning to identify errors, anomalies or outliers, and “holes” that exist in building data will improve data quality.
Another major concern for real estate firms is assessing the completeness of their data sets. Environmental data should be assessed with a few parameters: type of data captured, completeness of the dataset, and changes in year-over-year trends. Companies need to have visibility into what information they have and what they are missing.
Finally, when pulling data from disparate sources, it can be a challenge to ensure accuracy. Creating a direct data link to the original source is the safest way to ensure data integrity and avoid introducing human error. Adopting an automated solution that tracks unusual spikes in usage and intensity is also incredibly useful for spotting anomalies.
Timeliness and flexibility are also essential
Owners need continuous access to data—an annual review or retrospective will no longer suffice. Data simply becomes less reliable the longer it sits on a shelf. That’s why real estate owners need access to information that refreshes frequently— typically monthly, as new utility bills are posted.
“Good technology will drive improved sustainability reporting,” says Katherine Sherwin, BlackRock’s Global Head of Real Assets ESG Integration. “The data has become smarter, with better ways to collect it on a more frequent basis. The lesson for asset owners is to improve their digitization and data collection because the COVID-19 pandemic hasn’t dampened investor appetite for quantitative data. Regular sustainability reporting—much like financial reporting—will continue to be vital for transparency and investment decision-making.”
The best way for companies to gain real insights into consumption patterns and identify areas for reduction is to update the data on a regular basis. In many ways, this provides better insights and a more manageable process than a huge, once-a-year push to collect data for annual reports.
How owners report ESG information and the data points they are able to access on demand also matters. Though interest in ESG investing is on the rise, there is currently little guidance on what qualifies a company as ESG compliant or sustainable.
Because the capital markets can’t rely on a single standard, what qualifies as material ESG data often varies from investor to investor. They may in turn request different types of information at various junctures, or they might require companies to report their ESG data to multiple benchmarks and frameworks, including GRESB, CDP, and SASB. And, depending on where they are located, companies might also be required to comply with emerging regulatory frameworks, like SFDR (Sustainable Finance Disclosure Regulation) in Europe or SECR (Streamlined Energy and Carbon Reporting) in the UK.
In today’s rapidly evolving market, real estate owners and investors alike are certainly going to face challenges and growing pains. However, having reliable data on hand and being able to use that information to assess risks and opportunities is more than half the battle:
“There’s equal interest in both how an asset performs, and the approach asset owners are taking with their ESG integration,” says Sherwin. “Investors want to know not only that their investment is performing, but also that asset owners have processes to identify potential ESG risks and opportunities. Disclosure in the future will be about addressing both of these concerns.”
The lesson here is that trustworthy data is the cornerstone of any successful ESG effort, no matter what new ESG acronym the market will need to memorize and comply with next.
This article was written by Amanda Davis, Marketing Content Manager at Measurabl
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