23 Feb Transforming Markets
By Jeff Harder
Benchmarking sustainability is a win-win for global real estate investors.
The sustainability performance of portfolios has been an area of increasing focus within the global real estate investment sphere. That’s not entirely surprising, considering the impacts buildings can have on the bottom line: Energy efficiency can lead to lower operating costs, vulnerability to extreme weather can mean financial disaster, and bill-paying tenants are increasingly demanding features that promote health and provide superior experience. “One way or another, green building information is relevant to investors,” says Chris Pyke, chief operating officer of the Global Real Estate Sustainability Benchmark, also known as GRESB. “How they embed this information into their decision-making is an evolving process, but there’s a global consensus that this information should be on hand.”
That’s where GRESB, an organization that merged with the Green Building Certification Institute (GBCI) last October, comes in. GRESB applies sustainability metrics across real estate portfolios of multiple—and, in some cases, hundreds or thousands—of residential and commercial buildings. Every year, GRESB assesses how property companies and private equity real estate funds integrate and prioritize sustainability; the most recent survey covered 56,000 buildings around the world, worth a combined $2.1 trillion. “Investors recognize that superior environmental, social, or governance performance is often a useful proxy for high-quality assets and strong management,” Pyke says. GRESB is a window through which pension funds and other institutional investors can find out just how green their assets are—and, in the process, give a market-driven boost to enhance sustainability in the built environment.
In recent years, the finance world has given new attention to environmental, social, and governance (ESG) criteria. “We’re not saying that everything has to be green right away, but we think it’s important that companies are aware that the world is moving quickly toward ESG awareness,” says Gerios Rovers, executive director at the investment firm Cohen & Steers, one of GRESB’s investor members. “You’ve got to think about your environment and how your products fit into it, and that applies for real estate.”
Back in 2009, with reliable ESG metrics hard to come by, Dr. Nils Kok, an entrepreneur and associate professor of finance and real estate at Maastricht University in the Netherlands, spearheaded the creation of GRESB. The organization’s core functions involve establishing criteria, facilitating participants’ responses, and benchmarking how participants measure up. “This is something that really complements the traditional focus that green building has on individual project certification and helping projects get greener,” says Pyke.
The cornerstone of GRESB is an annual survey geared toward looking at how sustainability fits into the interests of property companies and private equity real estate funds. Every year, between April and July, companies and funds provide comprehensive data on how sustainability fits into their overall strategies, whether they assess long-term climate-change-related risks before acquiring a property, measurements of their energy consumption and greenhouse gas emissions, and other facets of sustainability performance. In September, after vetting the data, GRESB releases an analysis that assigns each participant a score reflecting their performance—both in absolute terms and relative to their peers’ performance—as well as areas for improvement. Those scores contribute to one of four categories that indicate how well the participant has woven sustainability into its portfolio—Green Star is the highest ranking. GRESB enables institutional investors to request survey results from companies and funds. “By asking for those results, you’re telling your investments, or the companies and funds you’re considering investing in, that you care about [sustainability] issues,” Pyke says.
By using the information available through GRESB—and associating strong results with high-quality assets—investors can spot underperforming funds and take action. “This typically does not disqualify the fund from investment,” Pyke says. “Rather, it may lead to a dialogue with the fund about how to improve its performance over a specific period of time.” In the future, investors could opt to select only top performers, or devote their resources toward improving low performers and capturing benefits.
In the five years since its inception, GRESB has seen growth in the number of respondents, and progress in how those respondents make sustainability a priority. In 2014, the survey had 637 participants—up from 543 the previous year, and roughly 200 in 2009. More than three quarters of participants employ monitoring systems to measure energy and water usage, greenhouse gas emissions, and waste. “GRESB basically uses transparency to encourage the pursuit of these activities,” Pyke says. And 36 percent of participants overall are Green Stars, compared to 22 percent in 2013, and the average participant score overall was nine points higher than in 2013.
When you look at the scores, it’s important to forget about the grades you got in high school: 2014’s average score of 47 out of 100 doesn’t indicate failure, Pyke says. “GRESB is a relative system, and that’s exactly where the middle should be,” he says. “…What we’re trying to say is who is relatively the best, and who has room for improvement. If we got to a point where everyone is [a Green Star], that would mean that GRESB isn’t doing what it should.”
The results also allow region-by-region breakdowns of sustainability performance in different markets. Australia and New Zealand are perennial leaders, with 70 percent of participants earning Green Star designations in 2014. By contrast, just 32 percent of North American participants were Green Stars. But considering that sustainability is “baked in” to the Australian market, Pyke says, he’s sanguine about our larger region’s future. “I think that when you look at Australia, you’re looking at the U.S. two or three years down the road.”
But when you start to wonder why real estate portfolios in North America aren’t neck and neck with their antipodean counterparts, the answer, he says, isn’t as important as the fact that GRESB provides the data and the transparency to make those observations in the first place—something that would have been impossible a little more than half a decade ago. “The details aren’t that important,” Pyke says, “but the fact that investors can and do ask the question is transformative.”