Starting at the bottom: the GRESB origin story | The Pulse by GRESB

In this episode of The Pulse by GRESB, we’re kicking off a special mini-series to celebrate 15 years of GRESB. Join our speakers as they dive deep into the journey of sustainable investing, the research that built the foundation of GRESB, and expectations for the coming 15 years. Watch the episode below, featuring:

Can’t listen? Read the full transcript below. Please note that edits have been made for readability.

Roxana: Hello everyone, I’m Roxana Isaiu, Chief Product Officer at GRESB. Welcome to a very special episode of The Pulse. This is the first of a three part mini series covering the origins of GRESB as we’re celebrating its 15 year anniversary. And joining me today is none other than Nils Kok, co-founder and former CEO of GRESB. Nils is a professor in real estate finance at Maastricht University and has made an impressive research career in financial aspects of commercial and residential real estate, with a particular focus on energy efficiency and sustainability of the real estate sector. Nils, very excited to have you here. Welcome.

Nils: Thank you, Roxana. It’s great to be here. Yeah, it feels like going back many years. Fantastic.

Roxana: Probably something that our listeners don’t really care about, but Nils is also the person that hired me at GRESB. And during that first interview, I do have to say it was GRESB and not “GRESB-ee”. Maybe something to clarify now. Nils, you’ve dedicated a considerable part of your career making the case for sustainable investing and doing the research necessary to support the business case behind it. Can you talk a bit about the fundamentals that motivated the initial setup of GRESB, but also about some of the most recent research that supports the case for sustainable investing?

Nils: Yeah, Roxana, thanks a lot. I think what’s fundamental to the foundation of GRESB, 15 years ago, as well as today, is that there is a business case for energy efficiency, for sustainability, and perhaps, if you will, for ESG, in real estate. And if you think about the chicken and the egg, when it comes to GRESB, there’s no confusion. I did research on the financial implications of energy efficiency and sustainability in commercial real estate and office buildings in 2007, 2008, coming out of the crisis. LEED, the standard for green buildings that was still nascent at that point, had just enough buildings for us to look at.

And there were, of course, plenty of buildings that were not LEED certified that were also relatively new or just renovated. And we compared the financial performance of these buildings in a way that, probably in the industry they don’t really care about, but econometritians do care about. So we did that in a academically sound manner. And what we documented is that green energy efficient buildings perform better in the marketplace before the crisis, but also coming out of the crisis. So higher occupancy rates, higher sales prices, faster rent growth, faster lease up rates, and ultimately all of that was translated into the price of commercial buildings. And that was really the foundation. That was the start. That was before GRESB existed.

I took that to a couple of pension funds and said, listen, folks, if you think about ESG, which by then was becoming more and more a word, now we’re, I think in the phase out era of ESG, it’s no longer so much a word. But if you care about ESG, you should really think about real estate. And we didn’t so much talk at that point yet about infra because that was an emerging asset class, but real estate was very much there. And ESG and real estate is where you can both have an impact, environmentally, but also then have financial returns. So to me, that is foundational to GRESB, that is what GRESB was built on. And that’s what is foundational today.

Roxana: How transferable do you think these fundamental criteria are to other asset classes?

Nils: Yeah, I think, first of all, when you talk about the broad ESG, or the broad green, or sustainability, there’s many elements that are in there, right? You could say, well, for energy efficiency, there’s carbon emissions as a North Star, or energy consumption, if you will, right? And that openly translates into carbon emissions one way or the other, depending on where you are with your energy mixes.
But once you start to unpack green in a broader way, there’s many different elements. And some of those elements are more salient for some, call it property types in real estate, but also to some asset classes, right? So if you think about data centers, for example, you may care less to some extent, about the people that work in that building, you still care about them, but there’s fewer people working in that building as compared to living, right?

Senior housing, student housing, multifamily, residential, etc, etc. And in the same way, In an office building, well you definitely care a lot about energy efficiency, but you also want to make sure that you create a space where people are, you know, as happy and as productive as possible. If you go kind of beyond real estate, and you think about infrastructure, and now you’re thinking about many different types or asset class within infra, you could also think about forestry, even. Toll roads, obviously, you have different ESG criteria. I think in all of those asset types and asset subcategories, different elements of ESG are important and have a relationship with bottom line. And bottom line can be related to risk. So you want to have that license to operate. You want to make sure that you comply with regulation. And sometimes it even helps to go beyond regulation because you get the city planners and those that give you the permit. You get them to act a bit more quickly or more favorably. So it’s not just meeting kind of the minimum threshold.

Roxana: Yeah.

Nils: So it’s risk management, but there’s also obviously optimizing performance.
And I think reputation is also very important in the real estate business where people are attracted to places. And they’re attracted to places that are nice and pleasant to be at with a good reputation. I mean, if you look at a Google review, that’s why you go to a place.

Roxana: So this is where we talk about value creation beyond risk management, and ultimately that’s the differentiating factor that investors are also after and are looking to quantify and are hunting for. So, going back to real estate, what does building performance beyond energy efficiency mean?

How can we think of it in a more holistic way and perhaps here we can talk a bit about some of the social aspects that are not as quantifiable at the moment, which is very similar to what we were talking about 15 years ago when energy efficiency was not as quantifiable.

Nils: Yeah. I sometimes say that the whole energy efficiency or carbon emission problem has been solved. That is from a technical perspective, right? Now we need the capital and now we need to overcome some of the market barriers that we still face in rolling out carbon emission improvements. But principally, I think we have the technology there, we just miss some of the other elements to ultimately get to a net zero world. And of course, we need time for that, right? A building is a, if you will, a durable good, right? It’s not like- an iPhone should be a durable good, but you still replace it every couple of years. You already see it with cars, it takes much longer.

Well, buildings, well, they’re like 50, 100 years. So it takes long to get that done. But we’re on the right track from a carbon emissions perspective. At least that’s what I believe. We can solve this. Now beyond that, like I said in my previous comments, there’s much more. That’s what I still like about GRESB. And that’s what I also like about some of the green building schemes at the asset level. What’s important is that we don’t stare ourselves blind on making a building as efficient as possible. Because that’s not the endgame. I don’t go to a building because it’s so efficient. Well, now think about the building that you go to. I’ll go there to, well, my home to sleep and to hang out at dinner with my kids. I go to an office building. And, especially today, that’s important, because it’s pleasant to be there because I can see colleagues, I can see them in a meeting room that’s amenable to having a good conversation.
So then you start to think about, and I’ve been thinking about that a lot over the last five, six years, about indoor environmental quality. Then you start thinking about temperature, for example, you start thinking about CO2 levels, not CO2 levels because you can so much see them, but because you can smell them, and because you can feel them if the levels are too high.

You can also think about more social elements like you indicated. How open is a building for us to run into each other? Is there vertical connection in a building, right? Very much a trend. Are there stairs? From a health perspective, that’s great, but it’s also great just from a connectivity perspective, rather than checking in at reception, swiping in, take the elevator to the 32nd floor, spend all day there. Go down, maybe for lunch, maybe not. That’s just not the office that I want to be in. And then when you think about other property types, because yeah, to some extent, I think that office used to be number one. It’s very much now in the living space, that’s where elements of human connection play a very important role. So I don’t necessarily think that every multifamily asset needs a dog spa or that every senior living asset needs a hairdresser. But I do think that every asset where people are living, they need a place where they can come together. And whether it’s to play bridge in the evening, or Rummikub, or Monopoly, or in student housing where they can study, or just have a drink together in the morning, or in the evening, that might be a different kind of drink, but I think that is really important.
So, energy efficiency. Critical number one, but you don’t go to a building because it’s energy efficient. You go to a building because you want to be in that building. And that’s where some of these other elements come to play.

Roxana: I would reinforce, that is why the concept of sustainable real assets, holistically, continues to be the scope of what we do, the scope of what we focus on, beyond decarbonization and beyond energy efficiency.

Nils: I think, that’s really important, but what you shouldn’t forget is that whereas the business case for reduction in carbon emissions or energy consumption is relatively easy to make and to convey to Investors, or well, at least those that pay for it, right, could even be the tenant. The business case for some of the other elements, and that even for water efficiency, and you can still measure water, but when it gets to health, so elements that you put in the building, such that you stimulate in a passive way that people, for example, take the stairs or improving air quality. The business case there is still less clear. Now, that’s not a reason for inaction, but it is something that we need to be mindful of, that we got to continue the quest, if you will, to draw these relationships between buildings that have these attributes or elements, and financial performance. And that will help, ultimately, the stewards of capital, whether it’s investors, whether it’s pension funds, insurance companies, to more easily allocate capital to that.

Roxana: Absolutely, absolutely. And as we talk about these things, it’s also very important to look at sector specific characteristics differently because what you’re describing in terms of internal staircase and health and well being and access to daylight will be different for an office or retail than it will be for a data center. And this is also a clear direction of travel for anyone that considers themselves a more sophisticated manager or user of property management. Now, since we’re here to reflect a bit on the evolution of GRESB, and conversely the industry’s evolution over the past 15 years, I thought it would be interesting to see how does our current experience compare to what we thought 15 years ago?
And so I looked for an early interview of yourself, and in one of those early interviews, you were saying, and I quote, “The topic of ESG investments is still fairly new in the investor universe. We need mainstream investment professionals that bring that knowledge of ESG.” How would you comment on that now? Would you still stand by that statement?

Nils: No, I think the industry has definitely evolved and evolved a lot. And when it comes to ultimate providers of capital, the stewards of capital, many more are now making, and again, I mentioned this, I don’t know whether ESG is still the right word because there’s been some pushback on that. But that the material elements of sustainability, the material elements of ESG, I would say the majority of the stewards of capital, of investors, are thinking about that today. I think we’ve made a lot of progress in terms also of the understanding of the different elements of ESG. That’s what we talked about previously, right?

What do I care about as an investor? If I’m an investor on behalf of the people that work in hospitals, doctors and nurses, you know, I may care about different things than, for example, I’m a steward of the capital for those in the construction sector, right, then I care about health and safety, probably much more. So, I think that different investors are more articulate in what they expect from their real estate and real asset investments. On the front of ESG. I think they’re much better to unpack ESG and pick and choose. And G to me, always has been kind of a, yeah, something that’s better known.
Alignment of interest, corporate governance. How do I structure a deal? And and S have obviously evolved. Now, do I think that we’re there yet? No, not at all. I think there’s still, you know, many investors that don’t fully understand the risk return implications of considering elements of ESG into their real asset investment decisions. I think there’s still investors that at diligence, don’t look at this critically enough. And even during the holding period, you know, don’t evaluate this often enough.

Roxana: When you say often enough, what does that mean?

Nils: Well, I think that at every point in the investment lifecycle, ESG, or sustainability, or green, or energy efficiency, should be be an element, right? And if you start all the way at development, it starts there. Typically, you start at acquisition of a standing asset, and then there’s management of it. There’s developing the business plan. Well, basically, what am I doing to further improve the building, to make sure that it not just stays on track? To get to net zero, but , hopefully that it gets there a little sooner. And then even at disposition. Where disposition might partially be driven by the fact that an asset is in the location that I no longer believe in. Or it might just be that the CapEx that are required for this building to comply with future regulation is just too high. So yeah, decide to sell it and I’ll let the next one take it. I think that’s perfectly okay. So, ESG is not just a tick the box at the moment of acquisition or at the moment of selecting a manager. It’s something that you gotta be able to address on a more regular basis. Also because ESG is evolving. So I was going to say climate risk is one where 50 years ago, well, we didn’t really do climate risk evaluation on assets. Well, today it’s something that an investor should do. Is that a lot of work? Well, generally, it’s okay.

You just do your scan and nothing shows up, fine. A couple of years later, you do it again. But it’s something that quite frankly, we didn’t have in the first GRESB assessment. And there’s other elements that were just not there. Or that were just much less important than they are today.
And that’s another reason why whereas investors may say, “Oh, you know, I’m on top of the game. all my, managers are reporting to GRESB.” I think that it’s not enough. You got to kind of go in, you got to go beyond the stars. You got to go beyond the score and say, where does this manager or this asset continue to lead? Hey, and where may it potentially lag? Or, if I want to be in a leadership position, where can we do more to make sure that we continue to be outperforming my peers?

Roxana: It’s interesting you touched on a few levels of information there, talked about the investors, the fund manager, and then the assets, of course. And, I think what we were observing at least 15 years ago, at least in the context of GRESB, is that that dialogue and the communication was in between the investor and the manager at that higher level. And investors were letting managers do their thing at the property level, at the building level. And, those barriers have started to break, and are breaking more and more. And we see the requests for more granular information coming from the investor all the way to the asset. So I don’t know if you have any comments on that or thoughts.

Nils: Well, it’s also the result, I think, of the development of the real asset investment industry, right? Any industry in the private asset business that starts out, it’s quite challenging for investors to get their hands on assets, right? So you’ll have many more fund structures, open end, etc., closed end. Now that still exists in real estate today, let there be no question about that. But at the same time, we see many investors also liking to be much more closer to the asset. So working more in JV structures, maybe in co-investment deals, even REITs that will have co-investments on the side. In that sense, investors are more into the assets today, especially the larger investors than they were 10, 15 years ago. Where they would take a more hands off approach as- okay, we’ll allocate to Odyssey. And that’s it. I think that’s still a great strategy. I think it’s still a great strategy to invest in REITs. But at the same time as an investor, I do want to understand more about the 300 shopping centers that Simon owns, right? I do want to understand more about the assets that are owned by Vernado or by Boston Properties.

Roxana: Interestingly enough, you mentioned three listed companies, so, which comes with a different set of challenges.

Nils: It does. But whereas previously, I would just buy shares in Boston Properties and say, okay, let Owen and team run their business in a way that they do so well. Today, I really want to understand where the assets of that listed firm is. I think on the private side, with larger funds, that’s obviously challenging with, 20 billion plus funds of let’s say, a Blackstone, but that’s probably what you sign up for. But even with the Odyssey funds, and then with some of the smaller- What is small, right? A billion dollar plus funds. And now as an investor, I just want to understand where my assets are. I probably don’t have a say in the business plan, but I just want to stay more on top.

And that’s where I agree with you. Investors do probably want to know more about where does this asset sit also from an energy efficiency and broader sustainability perspective.

Roxana: Right. Now we linked to 15 years ago, back to the present time, and to wrap up, what do you think or what do you hope to see happening over the next 15 years? In the world of GRESB, in the world of ESG, in the world of institutional investment in ESG?

Nils: You know, 15 years is great because in 15 years, you can really see change, right? We always overestimate the impact of anything, of technology, of a benchmark in the short run. So, wow, the world’s going to be different, but we underestimate the ultimate impact in the longer run.
Now, what’s the long run? In the long run, we’re all dead. But I think 15 years is pretty long. And I think in 15 years, we’ve seen great progress. So over the next 15 years, we probably overestimate what’s going to happen next year. Or the year after. But I do think when we look out at 2040, I would hope that we have an industry where zero net carbon, where we’re much closer to that for a much larger chunk of the industry.

Buildings are long lived, but hey, in 15 years we’re going to have quite some new construction and refurbishment of existing buildings. So I really hope that we can then say, Hey, look at these buildings, you know, they’re old. But also that we don’t just focus on net zero, but that we talk about a broader definition of sustainability. And we got to define what that is, right? So we can’t just say, oh, yeah, ESG generally is great. Okay, we got net zero, then we have a number of social KPIs. Health KPIs or Community KPIs where we see meaningful progress and that we can take the community and the investment community with us. And that just takes a long time.

It took a long time for investors to say to their managers or operators, do you report to GRESB? Yes. Okay. Congratulations, but everybody does that. So let’s see what exactly you adjust. Hey, I’m looking at indicator, you know, new construction 5. 1. Oh, why don’t you do that? That’s what most of the industry does. So at that level of sophistication, if we can keep on moving into that direction, with data that’s ever more granular, and I know that’s a lot of work and I know it’s hard, but that’s where I think technology can be a great help to ultimately get data out of the buildings, into the hands of the investors, both from a financial and non financial perspective.And we’re on that trajectory and looking out to 2040, I’m a big believer that we’ll get that more granular data, that it is actionable, and it will lead ultimately to more buildings being net zero, and for us to have insight into other ESG KPIs that are important for the industry, but also for the people that work in buildings.

Roxana: Famous last words. Thank you so much. We’ll continue doing our part in it and I’m excited for the next 15 years.

Nils: Yeah, great.

Roxana: Thank you for joining and thank you for our listeners for tuning in.