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.
Real estate owners and operators need to report accurate ESG information to investors and regulators, and they also want aggregated data that can be used for multiple purposes. For GRESB reporting, one of the biggest challenges is collecting and managing asset-level energy, water, waste, and greenhouse gas data. When it comes to optimizing your overall ESG strategy, it’s ideal to automate utility data feeds to eliminate estimates and time-consuming manual work.
Best practices focus on utilizing a single software platform to automate the aggregation of environmental consumption (energy, water, and waste) and greenhouse gas data. This data can be used to meet the core requirements of hundreds of different ESG programs and an infinite number of investor reporting requirements. You can also use this data to go beyond ESG reporting to enjoy further benefits, from short-term savings to increased long-term asset value with greater appeal for investors. Read on to learn about key opportunities to leverage energy efficient buildings and compelling ESG data.
Saving money
The most obvious benefit of energy efficiency is reduced operational costs. Building owners implementing software-driven energy strategies can save almost USD 0.40 per square foot. In a 300,000 square foot building, that amounts to USD 110,000 more for the bottom line, every year. Energy intelligence software typically nets 2-5 percent savings across a portfolio. Energy automation technology for HVAC equipment can produce typical returns of 10-15 percent.
Earning federal tax credits
The Inflation Reduction Act extends and expands the energy efficient commercial buildings deduction that was made permanent under Section 179D in 2021. Buildings that increase their energy efficiency by at least 25 percent will be able to claim this deduction, with bonuses for higher efficiency improvements. The 179D Tax Deduction is undergoing significant changes in 2023. The maximum deduction will increase to USD 5.00 per square foot, up from the previous limit of USD 1.80 per square foot.
A tax deduction is available to owners or designers of commercial buildings or systems that demonstrate a 50 percent reduction in energy usage accomplished solely through improvements to the heating, cooling, ventilation, hot water, and interior lighting systems. Partial deductions of up to USD 0.60 per square foot can be taken for qualifying measures.
Signed into law in 2005, the Energy Policy Act (EPACT) lays the foundation for the new federal tax incentives for consumers and businesses that pursue energy efficiency and the use of renewable energy. To qualify for the EPACT tax deduction, building owners must demonstrate that the energy savings meet specific criteria of consistency and accuracy based on ASHRAE Standard 140-2004 and other criteria such as California’s Title 24 Alternate Compliance Method. To determine compliance, third party inspectors must review the building plans and verify that:
• Energy use rates were calculated by DOE-certified software; and
• The energy savings technologies were installed during construction
Receiving utility rebates
In addition to federal grants and tax incentives, local utility companies and states often offer rebates to businesses that make energy-efficient improvements to their buildings. These rebates can help to reduce the cost of improvements and make them more affordable for businesses. To be eligible for a rebate, businesses must typically meet certain requirements, such as installing renewable heating and cooling systems, solar systems for electricity and energy efficient lighting. Local utility companies can provide more information about their rebate programs and how to apply.
The EPA offers a free tool on its ENERGY STAR® website to search for rebates on efficient commercial building equipment. You can find incentives on products that are ENERGY STAR certified. And if you can’t find what you’re looking for there, the Utility Genius rebate finder contains additional types of commercial equipment in categories where ENERGY STAR certification is not available.
Meeting compliance requirements
Supporters of ESG as a standard for disclosing climate-related risks are very pleased with regulatory changes from the Securities and Exchange Commission (SEC). A new rule, scheduled to take effect in October 2023, incorporates ESG concepts into required climate disclosures for publicly traded companies. For example, the rule mentions that the Investor Advisory Committee — a part of the SEC — recommended that, “the Commission take action to ensure investors have the material, comparable, consistent information about climate and other ESG matters that they need to make investment and voting decisions.”
In a March 2022 draft proposal, the SEC said it would require public companies to spell out their own direct and indirect greenhouse gas emissions, known as “Scope 1” and “Scope 2” emissions, plus certain types of “Scope 3” emissions from suppliers and customers.
Enhancing property value
Energy savings produced by more efficient energy management drop straight into operating income and significantly boost building value and cap rates. An energy strategy can add about USD 45 of value per square foot for a typical 500,000-square-foot office building in Manhattan, N.Y., through average rental increases, energy savings and maintenance savings. If an office building’s cap rate is 7 percent for example, an increase in income of USD 110,000 would raise the asset’s value by a substantial USD 1.6 million.
Attracting investors (and meeting their demands)
A growing number of investors use ESG criteria as part of their decision-making process. For example, more than 75 institutional investors, collectively representing over USD 18 trillion of institutional capital, use GRESB data and analytical tools to benchmark, improve and communicate environmental performance.
To optimize reporting and meet the demands of investors, there is a push for integrated systems from an ESG perspective. Otherwise, when you have to exchange data between systems, there can be “breakages” and errors. According to real estate energy expert Joe Consolo, “Investors want access to their energy information on the same system as the investment data.”
Centralizing operational and ESG data on a single platform
As is true for all operational metrics, when it comes to ESG data, transparency is critical. To ensure more timely and detailed information, it’s key to reduce or eliminate moving data between disparate systems. To accomplish this, many companies have adopted a fully connected platform encompassing investor, investment, and asset operations including energy management. This integration delivers a single source of truth that starts at the underlying asset, rolls into the investment structure and then ultimately out to the investor.
Along with data purity and accurate ESG reporting, centralizing portfolio information, and performance analytics produces real efficiencies and cost savings. It also increases investor confidence. Having visibility of what is happening in each asset is important from a risk management perspective. In addition to telling a company’s ESG story and enjoying all related tax deductions and other credits and rebates, there are additional gains in having consistent processes at the asset level, which can assist in increasing income and asset value as the broader real estate industry commits to a more sustainable future.
This article was written by Randy Moss, Manager at Yardi Systems.
