Is private real estate’s top ESG benchmark robust enough yet?

GRESB, private real estate’s leading ESG benchmark, is celebrating a decade in existence. The industry organisation, which began life in 2009 in response to three pension funds asking for ESG data, has experienced a surge in membership since. Today, with more than 1,000 portfolio entities and $4.1 trillion in real estate currently subjected to its scoring system, GRESB and its annual evaluations have become the most anticipated ESG-oriented assessments in the industry.

The benchmark is one of private real estate’s most holistic and best recognised measures, says Peter Collins, Europe president at manager Kennedy Wilson. It is also a much relied on tool for managers to assess their sustainability credentials across an entire fund’s portfolio, explains mega-manager Blackstone’s global head of ESG, Alison Fenton-Willock. Consultancy and asset manager Townsend Group incorporates ESG analysis for initial due diligence and monitoring of portfolio positions. For interested clients, Townsend leverages GRESB scores for portfolio analytics and other quantifiable metrics for reports on real asset investment portfolios, according to partner Jennifer Stevens.

“GRESB is a one-stop shop for many investors and investment managers in covering their ESG practices,” she says.

GRESB score-included assessments by consultants like Townsend are now anticipated by managers worldwide, with a decent score sometimes contributing significantly to a ‘yes’ on an investor or lender recommendation. Townsend rates a manager by evaluating the ESG factor through its GRESB score along with other ESG-related certifications, metrics and actions the manager has taken, Stevens says.

On the investor side, Japanese bank Norinchukin committed an initial $100 million in January to a program that invests in J-REITs relying on GRESB scores for their ESG evaluation.

On the credit side, lenders increasingly favor loans where the underlying assets are considered sustainable, with firms issuing green bonds raising their finance at lower coupon rates, observes David Hirst, head of the real estate and private markets sustainability work group at Swiss asset manager UBS, which started issuing green bonds in the Japan J-REIT market in 2018. Elsewhere, lenders explicitly factor GRESB scores in deals. European office REIT Gecina and lender ING France, for instance, signed a €150 million sustainability performance-linked loan in 2018 with a margin partially determined by GRESB ratings.

While ESG themes have all come into the mainstream spotlight in recent years, the ‘E’ – or environmental – aspect has become a particularly important consideration for many private real estate executives. Countries the world over are sounding the alarm on the effects of climate change after recent surges in wildfires, floods and other natural disasters, many holding the real estate industry at least partially responsible for the acceleration. Buildings and construction account for 36 percent of global energy use and 39 percent of energy-related carbon dioxide emissions, according to a 2017 report from the UN Environment and International Energy Agency. That beats out transportation, which accounts for 28 percent and 22 percent of global energy consumption and energy-related CO2 emissions, respectively.

In some respects, the progression of Amsterdam-based GRESB is private real estate’s response to the increasingly severe climate challenge facing the planet today. And yet, in conversations with more than 15 sources, it is clear that while the benchmark has made progress in its decade of operation, it still has a ways to go in helping the sector to meaningfully combat the adverse impacts of climate change. Moreover, some of PERE’s sources believe GRESB’s scoring requires fine-tuning and it could better incentivise its users to deepen and expand on their participation.

Assets in transition

One of the main concerns surrounds the notion that the GRESB assessment favors portfolios containing new buildings, skewing the benchmark to be more relevant to core managers than their value-add or opportunistic cousins.

Alan Snoddy, managing director of global real estate investment at The Church Pension Fund, says one manager he works with is focused on impact investing and ESG criteria, but has opted not to join GRESB, assuming the view that the benchmark lacks relevance for those managers engaged with value-adding or development. “GRESB measures where you are today rather than where you are going,” he says. “You can have a very high GRESB score if you buy a lot of LEED Platinum buildings.”

Instead, Snoddy believes, the industry needs to look at how a manager is moving the needle. A manager buying a new LEED Platinum building will report a much lower energy use per square foot than one buying a 120-year-old building and doing a massive retrofit. He believes retrofitting an old building will move the needle much further than simply holding Class A buildings, but that the current GRESB scoring system could disincentivise this.

Jenny Cheung, an asset management vice-president at Hong Kong-based manager Phoenix Property Investors, says it is a challenge to achieve a good all-around ESG performance score with some projects, particularly in built-up cities like Hong Kong where land is scarce and a manager can spend significant time waiting and negotiating with sellers to build up ownership in an asset. Such a lengthy process doesn’t translate favorably on a GRESB assessment, according to Cheung.

“The current ‘one-size-fits-all’ approach needs to evolve to a more tailored approach to make it relevant and bespoke to individual funds and portfolios,” says Bill Hughes, head of real assets at Legal and General.

While the GRESB assessment plays a large role in the industry’s decision-making, quantitative measures like these are still limited, according to Snoddy.

He says he has issues with investors that rely on comparing managers based on scores alone, because the numbers should only be considered a starting point. “You have to do your diligence and make sure these managers are doing what they say they’re doing.”

Focus on assets

Another gripe relates to GRESB’s focus at the fund level, not at the asset level. Detractors here say GRESB and other benchmarks have a low barrier to entry and do not address the real underlying impact of a vehicle’s buildings on the environment, says Ed Dixon, head of ESG at Aviva Investors, the asset manager of UK insurer Aviva. By his reckoning, GRESB places too heavy an emphasis on policy and procedure to entice participants to disclose ESG data, with well-managed companies able to achieve a good score by being transparent and developing environmental processes.  Even companies with a high fossil fuel impact can produce GRESB-relevant policy and procedures relatively easily, he explains.

“A large, well-run company, which also happens to have very high emissions associated with their activities, can join something like GRESB and look pretty good,” Dixon says. “That’s a problem because the real estate industry is a major contributor to the climate crisis.”

As membership grows, Dixon hopes the organisation will drill down into more granular asset-level data, adopting more stringent standards that penalise assets posing greater negative impacts on the environment.

For now, however, GRESB does not provide investors with any kind of clear impact measurements, notes Bridge Investment Group partner Inna Khidekel. For her, it is more of a scorecard for how a company or fund is performing relative to peers on overall benchmarks. That score can offer comprehensive insight at the company level, but that is different from seeing the level of tangible outcomes and impacts of each dollar within a portfolio. It does not help provide actionable intelligence as it relates to impact investing the way that the Global Impact Investment Network does with its IRIS reporting system, she says.

“GRESB is an overarching score,” says Derk Welling, senior responsible investment & governance specialist at APG. “Ideally, I would like to see [scores] for different aspects like water, energy, carbon emissions – all different aspects, separate from the organisational score.” He believes a portfolio’s ESG performance should be measured at a more granular level and that GRESB will one day be more critical in recognising existing asset certifications. Indeed, certified asset-level data will provide investors with more information to ultimately inform investment decisions, he says.

As Legal and General’s Hughes points out, GRESB’s utility as a decision-making tool is key. “You get to a place where GRESB can be building on the transparency and measurement that’s been going on to really help in driving behaviors around what people are calling the climate crisis,” he says. He believes that the organisation needs to evolve and start focusing on absolute targets rather than relative targets. This includes being more thoughtful about measurements like net-zero carbon.

Score building

The industry’s competitiveness around scores also raises the question of whether the assessment encourages a proliferation of resources into score building rather than into taking concrete action.

GRESB says it offers resources on its platform to help managers collect the appropriate data and fill out the assessment. It says managers should not need help from a consultant. However, Khidekel says using a data provider and selecting the right consultant can make a difference in scoring. “You may be able to improve your score if you partner with the right consultant, or if you answer questions a certain way,” Khidekel says. “It’s kind of like SAT prep.”

ESG consultants advertise their ability to help clients reach top GRESB scores or building certifications. Consultant LORD Green completes annual GRESB assessments on behalf of clients that were then recognised as GRESB ‘Green Stars’ – the top quartile of their GRESB peer group. Elsewhere, some consultants will provide guidance on corporate strategy but decline to help with asset-level assessments and certifications. Others are willing to complete assessments on behalf of managers, according to GTIS Partners’ co-founder Josh Pristaw and vice-president Hal Doueck. The manager, and others, including Swiss bank UBS and Aviva Investors, view consultants as a specialist resource that can add perspective and assist with more burdensome tasks when seeking accreditation, such as data collection.

However, Welling believes a manager that relies heavily on external consultants to fill out the GRESB assessment has yet to embrace the ESG agenda internally, regardless of how high their scores may be. “I would not be in favor of a model where every year, a consultant is hired to complete the GRESB questionnaire,” Welling says. “How seriously does this manager take this issue if they still need to rely on external consultants to complete a questionnaire?”

Vision for the future

As GRESB passes into its next decade, the organisation says it is prepared to continue revising its assessment. “I think we are in a transition from ESG as a metric of engagement to ESG as a metric of performance,” says Roxana Isaiu, director of real estate for GRESB. The last 10 years of GRESB were about bringing managers to the table, defining ESG materially and agreeing on the correct industry terminology, she says. Over the next few years, the organisation wants to use the large data set it holds to establish minimum requirements and optimal levels of performance.

The pre-release of the 2020 GRESB Real Estate Assessment is already announcing changes, including placing a greater emphasis on asset-level information. This year’s assessment will look separately at the management of sustainability and portfolio performance and make asset-level reporting mandatory, Isaiu says. For example, a portfolio with 20 assets will need to report data for categories like energy consumption, carbon emissions, efficiency measures, water and waste for each individual asset. Managers will also need to account for every asset within a portfolio by providing verified addresses, another departure from before when properties could be submitted on an aggregate basis. For this, the submission process will include asset geolocation linked to Google Maps. This will make it difficult for participants to invent assets that do not exist, or include assets not in the portfolio. That, in turn, should improve an organisation’s data validation process, according to Isaiu.

Though GRESB will not be sending staff to visit assets in person, every GRESB submission will continue to have a layer of human oversight as well as automated appraisal. If necessary, managers will receive calls to corroborate information, Isaiu explains. But with more than 100,000 assets in the database, GRESB maintains that in-person visits would be impractical.

Isaiu acknowledges there has yet to be a clear standard on what constitutes an ideal ESG performance level, whether it be on energy consumption or carbon emissions. However, GRESB is involved in a project with the European Commission to develop decarbonisation pathways to improve transparency to, eventually, determine the optimal pathway for performance, she says. The organisation is also starting to compare the absolute versus relative performances of portfolios, which may add more nuance. “There is still a lot of room for improvement in the industry, but the one-eyed man becomes seeing in the land of the blind,” Isaiu says. “That’s what competitive advantage is and that is market behavior influenced by the nature of this benchmark.”

When questioned on the benchmark’s current bias toward core managers acquiring newer buildings over value-add and opportunistic investors, GRESB clarifies it tries to group managers by risk-return strategy and property type where possible. The assessment includes a ‘like-for-like’ metric to acknowledge year-on-year improvement on factors such as carbon emissions and water consumption. This comparable rate evaluates the environmental footprint of the portfolio and is one metric that feeds into the greater performance component of the GRESB assessment. In 2019, a manager earned 2 points for improvement in the like-for-like ratio, 0.5 points for reporting like-for-like data, 1.5 points for reporting asset-level data and 8 points for data coverage. The 2020 GRESB assessment weighting will be available on the website on April 1, 2020.

Nevertheless, she states that the inclusion of like-for-like rates and making group comparisons based on strategy and property type would not be a cure-all. For example, a value-add project that has stalled would still be included in the annual assessment. The intention to refurbish and improve the asset matters, but the environmental footprint still needs to be accounted for when the asset is part of the portfolio, Isaiu explains. “Within value-add, you’ll have different situations. Within core, you’ll have different situations. You can go down the rabbit hole very deep and find all sorts of non-comparable items.”

Ultimately, standardising a single ESG metric for the industry remains a challenge because it must be comprehensive enough to cover all aspects of ESG, globally and across regions and across property types, according to NG Beng Tiong, assistant group chief executive and group chief operating officer at Singapore-based manager ARA. It must also allow for a structured peer rating, he says.

Combating climate challenges remains an uphill battle far beyond the realms of private real estate. The sector has a consensus of support for the work of GRESB. However, with climate challenges evolving rapidly, the industry cannot afford lax interpretations of what a sustainable building is for much longer, Dixon says.

He believes the next few years will require the benchmark to maintain its position as the favored assessment, but also to perfect its appraisal to force the industry to more meaningfully move the needle on environmental performance. Isaiu agrees that this is not a time for complacency and that the industry can no longer afford to turn a blind eye to ESG and climate risks.

But it must start somewhere, counters GRESB’s Isaiu. “In many ways, we as an industry are all inventing the wheel as we go,” she says. “Remember, we have to come up with solutions to problems that have never been solved before.”

Timeline

April 1 2020 GRESB real estate assessment opens in the GRESB portal

July 1 2020 Submission deadline. Participants have a three-month window to complete the assessment

September 1 2020 Review period begins. Preliminary individual GRESB results will become available. Members will have one month to submit a review request to GRESB through a dedicated form

October 1 2020Final results will be launched to participants and investor members