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Health plays a critical role in ESG measurement

Published on 5 Apr 2022

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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.

Health plays a critical role in ESG measurement, GRESB insights
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Growing Demand for Consistent ESG Reporting

Over the past two years and amid the COVID-19 pandemic, while some trends were disrupted, others accelerated. ESG investing and reporting is one of these trends that has gained significant steam —and it’s not slowing down. Global ESG assets are on track to exceed $50 trillion by 2025, meaning ESG assets are expected to account for an impressive one-third of the entire global economy.

As ESG investing expands, reporting demands are also intensifying. According to an article that appeared in the Harvard Business Review, ESG criteria impact roughly $30 trillion, or a third of all professionally managed assets, an increase of more than 30% since 2016. As such, ESG reporting has never been more important. Benchmarks and frameworks like GRESB offer investors an important tool to evaluate actors across the real estate sector and guide decision making, and tools like the Fitwel healthy building certification system allow the real estate industry to benchmark and certify their properties, better understand the performance of their portfolios, and use the information provided through the Fitwel platform to make strategic decisions about their investments.

The growth in the market’s commitment to ESG has also led to increased regulation of this space, with the SEC formally proposing a standardized climate disclosure rule and the UK, New Zealand, Switzerland, and EU proposing similar requirements. While GRESB has already been requesting climate-related metrics, in addition to much broader disclosures, this regulatory push will likely create more consistency across the various standard-setting organizations. This is especially relevant when it comes to those metrics that connect with climate change, such as indoor environmental quality, green space, flood risk, and bike infrastructure –many of which also impact health.

Disclosure requirements have been shown to accelerate action, and while the disclosures target climate change, the impact will certainly be much broader. A recent report published by the Urban Land Institute argues that given the compatibility of sustainability and health goals, the greatest impact can be achieved when strategies are considered holistically and the two areas aren’t siloed. Health plays a significant role in this ever-evolving conversation, and human outcomes can be a focusing lens when it comes to measuring impact.

Health, ESG & Impact

Another trend that has witnessed significant forward motion amid COVID-19 is the real estate
sector’s commitment to the healthy building movement. While regulatory bodies like the SEC
are addressing ESG from a climate change perspective, within the real estate sector, the
conversation has moved beyond net zero and carbon neutrality to considering the ways in which
assets can address ESG holistically. Leveraging a health-focused lens is one way the real
estate sector can focus its efforts across the environmental, social, and governance pillars.

More than a century of public health research has established a conclusive and measurable
connection between health outcomes and the built environment — buildings, their surrounding
sites, and public spaces. 5 Reforms to urban planning and building design at the turn of the
twentieth century played a central role in the mitigation of infectious diseases like tuberculosis
and cholera. In the latter half of the twentieth century, chronic diseases overtook infectious
disease as the leading cause of death, and once again the design of communities and
buildings represented a fundamental solution to risk factors like physical inactivity and obesity,
as well as silent threats like social isolation. Needless to say, the idea that the built environment
impacts health isn’t new, but the demand — as well as our understanding of the connection —
has certainly grown considerably over the past two years.

Because of COVID, “health” has become a risk for businesses. And because risk management
and mitigation are essential to the real estate sector, developers and investors are increasingly
aware that they must consider human health in their business decisions. What used to be a
“nice-to-have” is now a business imperative. Healthy building certifications are increasingly
being called upon within ESG reporting frameworks as a tool for demonstrating action.
According to A New Investor Consensus: the Rising Demand for Healthy Buildings, 61% of the
investors surveyed were using building certification systems as a way to address ESG priorities
in the real estate sector.

This is not just because these certification systems help check the box on ESG disclosures, but
also because health has been shown to be good for business. Early data suggests that, on
average, healthier buildings perform better in tenant satisfaction and stability and also have a
higher likelihood of tenants recommending a property. And while the findings from the past two
years are immense, COVID is not the only issue driving the healthy building movement. The
value of this conversation moves far beyond indoor air quality, and businesses must prioritize
holistic health to generate real, long-term benefits. Even before COVID turned the world upside
down and transformed a “nice to have” into quantifiable business risk, a widely circulated MIT
survey found there was a 4.4 to 7.7% increase in effective rent per square foot for buildings with
healthy building certifications.

Health has been shown, repeatedly, to be a key to value creation and risk mitigation, and we
now must move forward to quantify that impact.

Approaching Metrics Holistically

Another trend that has gained momentum over the past several years is the growing demand for data, metrics, and impact evaluation to guide investor priorities. In addition to financial factors, when it comes to ESG investment, investors are also interested in how an asset addresses environmental, social, and governance issues. And when it comes to evaluating risk, the more information the better. 

There is a growing understanding that rather than simply measuring inputs (such as the number of bike parking spots in a building), to fully understand investment risk, it is also important to consider the impacts (such as frequency of use of bike parking spots) and outcomes (such as the physical activity levels of employees or the reduction in car use).

Pre-COVID, demand for ESG considerations was highest among commercial properties and workspaces, but now the demand among residential properties is increasing, which will only increase the demand for consensus regarding what to measure. In its current state, Fitwel links each strategy to specific health outcomes based on public health research, which offers valuable information about the impact on a macro scale.

As a result of the intensifying focus on occupants, growing market awareness, and increasing reporting demands, investors and the real estate industry are looking for more reliable ways to evaluate the impact of ESG strategies. With public health at the intersection of each of the ESG pillars, there is a need to evaluate ESG strategies through a public health lens and define a protocol for measuring impact on a more contextual level.

For example, when bike infrastructure is provided on-site, does that have a positive impact on the proportion of occupants that opt to bike to work? This is a strategy that has both environmental and social repercussions, and we want to provide our community with an effective way to measure those impacts.

By aligning on a common set of metrics, the industry can commit to validating both the health and financial outcomes of ESG investments within the built environment. This will be a vital effort as Fitwel works to accelerate market transformation when it comes to promoting health across the real estate sector.

Moving Forward

Based on the gaining momentum of ESG reporting, the healthy-building movement, and data-informed decision-making, there is a notable opportunity to leverage health impact metrics as a tool for evaluating ESG investments within the real estate sector. At its core, ESG investing is about creating value, and we see health as one of the greatest value creators out there.

It took about ten years to create a consensus around the metrics defining the E (the environmental pillar), and this is currently where we stand when it comes to integrating health into the conversation. Yet, there is a growing demand for reliable metrics that define the role of health within the ESG conversation, and Fitwel is committed to supporting the effort to reach a consensus as quickly as possible, using what was learned from the environmental movement and what we already know about the connection between the built environment and health outcomes.

This article was written by Sara Karerat, Director, Applied Research & Grace Dickinson, Senior Analyst, Applied Research, from Center for Active Design.

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