The NCREIF PREA Reporting Standards, a joint standards initiative formed by the National Council of Real Estate Investment Fiduciaries and Pension Real Estate Association, has published a list of the most important ESG key performance indicators for private real estate managers and investors to prioritise.
The industry’s increasing focus on ESG in recent years has led to numerous regional and global reporting initiatives, resulting in hundreds of KPIs for which managers and investors can provide or request information. These include the European Association for Investors in Non-Listed Real Estate Vehicles; Global Reporting Initiative; Global Real Estate Sustainability Benchmark; Principles for Responsible Investment; Sustainability Accounting Standards Board; and Task Force on Climate-related Financial Disclosures.
But such a proliferation of efforts has made the standardisation of ESG reporting a challenge. “ESG reporting is the Wild Wild West,” says Jessica Long, head of sustainability, Americas at Nuveen Real Estate and a member of the Reporting Standards’ ‘Think Tank’ consisting of senior ESG professionals. “Everybody’s producing a sustainability report and putting out numbers, but there’s no real standard reporting guidelines. There are a lot of voluntary guidelines, but there’s no consistency.”
In response, “what we did was we tried to look at all the reporting frameworks and boil them down into what metrics really matter,” says Laura Craft, global head of ESG at Chicago-based manager Heitman. Members of the Think Tank ranked the KPIs from the various initiatives in order of importance to come up with the prioritised list of KPIs across 40 sub-categories. The KPIs are categorised as either high priority, recommended or optional; and organised under three key ESG reporting principles: Firm/Platform-Level ESG Information; Vehicle ESG Overview; and Vehicle ESG Strategy and Objectives & Performance Reporting.
Think Tank Members
Investors: California Public Employees’ Retirement System (CalPERS), New York State Common Retirement Fund, New York State Teachers’ Retirement System (NYSTRS) and Oregon State Treasury.
Investment managers: Ascentris Real Estate Private Equity, BentallGreenOak, Berkshire Residential Investments, Blackstone, Heitman, Morgan Stanley Investment Management, Nuveen Real Estate, Principal Real Estate Investors and QuadReal Property Group.
Advisers: KPMG and StepStone Group
The ESG KPIs and the related key principles, which were unveiled in October, are intended to make ESG reporting more cohesive, given the disparate focuses of existing initiatives, Craft explains. For example, while GRESB focuses on the fund level, PRI is more firm-oriented and TCFD targets climate risk. “There’s nothing that necessarily pulls it all together,” she notes. Additionally, the KPIs address current gaps in reporting: “We’re also looking at DEI initiatives which we don’t think UNPRI or GRESB does an in-depth job at this point.”
Another goal of the prioritised list is to add clarity to ESG reporting, Craft adds: “I personally have a hard time reading a GRESB report and understanding what the responses are. So I’m hoping that this will make it easier to tell the ESG story.” She stresses that the reporting framework is intended to be “a tool for the industry by the industry,” rather than another reporting requirement.
Michael McGowan, associate portfolio manager at the California State Teachers’ Retirement System, also expects the KPIs “would reduce the reporting burden on our partners,” given the amount of time typically required to complete ESG reporting for other initiatives. For example, “it is no small task for a fund to submit to GRESB,” says Long. “It’s a lot of work and my team is currently in the throes of GRESB season. It’s very hard for anybody to just jump into that.”
The significance of the KPIs
Tom Hester, managing director at StepStone Real Estate, the real estate arm of private markets firm StepStone Group, likens the ESG KPIs to the Reporting Standards’ effort over the last 10-plus years to set recommended and required disclosure requirements and certain metrics for real estate funds. “Over that time period it is probably the single most important industry initiative of that era,” he asserts. “It created conformity, it created consistency, it leveled the playing field.”
With regards to ESG, “I’ve never seen an initiative with real teeth move as quickly through both the private and the public markets as ESG has just in the last several years,” he says. ”So I think that it’s going to provide the same benchmarking, the ability to make apples-to-apples comparisons.”
The publication of the KPIs also comes at a time when the US Securities and Exchange Commission has made ESG a continued focus and cited “greenwashing” – which it defines as “overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection, such as in their performance advertising and marketing” – as an area of scrutiny in its reviews of ESG-related advisory services and investment products.
“If you’re able to set a best practice or a standard and say, this is the type of data that should be reported on and disclosed, it sets a bar that makes greenwashing a lot more difficult to do,” says John Caruso, global head of fund finance at Nuveen Real Estate. “It’s a lot easier to say you’re doing something and not have to back it up when nobody knows what that data should be to back up your claims. But if we’re able to set that best practice, then a lot of that murkiness goes away.”
The metrics are expected to be adopted immediately by private real estate’s most prominent managers and investors. “Standardising ESG KPIs and identifying ESG best practices in the real estate industry would help create a uniform language for investors,” says McGowan. “This would allow us to better compare and contrast what is being done at various levels, including with the firm and individual assets. Having a set of KPIs also would allow us to track and monitor trends over time, which could help mitigate negative impacts and amplify positive ones.”
The main priority was to ensure the KPIs were “scalable and approachable” and could be used by any manager or investor, says former Reporting Standards director Marybeth Kronenwetter, who spearheaded the effort to establish the ESG reporting guidance. “What we did find is certain groups are really in their infancy as far as ESG reporting. Other groups have done an extensive amount of work with respect to ESG reporting.”
ESG reporting is particularly complicated for private real estate, Kronenwetter observes. “You really need to look at this not only from your firm, but you also need to look at it on a vehicle-by-vehicle basis,” she observes. While a long-term hold strategy allows for implementation of extensive ESG and DEI programs, a more short-term hold strategy will have different considerations. “This set of ESG guidelines helps people navigate through that significant complexity with respect to looking at real estate investments.”
Michael Morrell, manager of global real estate investments and commercial lending at the New York State Teachers’ Retirement System, views the ESG KPIs as “guidance, not only for investors on how to start the conversation and what questions to ask, but also for investment managers on what kind of information they should be reporting, and what kind of information investors are looking for.”
NYSTRS has largely implemented the KPIs that are considered industry best practices but is now working on improving its more detailed property-level data collection. “Some of these KPIs are giving us a framework for information we should be gathering at the property level,” Morrell says. “So it covers the firm that we want to work with and do business with, the vehicle we want to invest in and how ESG goes into those investment making decisions. And then once you acquire the property, what targets and measurements you should have.”
For the properties in its directly owned portfolio, NYSTRS plans to incorporate the ESG KPIs into the annual business plans of those assets. On the commingled fund side, NYSTRS has already made ESG a formal section within its investment memorandums and has also been requesting DEI information from its managers for the past two years. But with the new ESG reporting guidance, the pension plan intends to have further discussions with its managers, Morrell says: “First, is the investment manager aware of this guidance that’s been put out? And what are their plans for trying to comply and provide this data to their investors?”
Meanwhile, Nuveen Real Estate has worked to align its own disclosures with the ESG KPIs as the prioritised list was being put together. “It has helped us identify gaps in our disclosures,” Long explains. “So improving our disclosures to be more thorough and hit on all the KPIs has been one key part that we’ve been focused on.”
But there are multiple hurdles to improving ESG reporting, first and foremost data access and availability, Long remarks. “You’ll hear people talk about getting tenant data,” she says. “The hurdle and expense that any company would have to collect, store, aggregate, check all of that data is something that we’ve been very focused on, and even as a company with a lot of structure around it, it’s still a challenge.”
She adds that the ESG information investors are looking for “sits in a lot of places”, including in fund documents and corporate sustainability reports, and reporting standards will involve more clearly identifying where the data can be found. “If an investor is asking a question, we want to be able to say this is where this is documented,” she says.
The consistency of information is another challenge, adds Morrell. Depending on the structure and the number of parties involved in an investment, and who has control over that data, “it will be a challenge to try and collect data in a consistent timely manner”, he says.
ESG compliance as a differentiator
Hester, however, believes that like managers that conform to certain reporting standards to have funds in the NCREIF Fund Index – Open End Diversified Core Equity index, firms will need to be comply with ESG reporting guidance if they want to be taken seriously as responsible investors. “Because, ultimately, there’s finite capital, but there’s no shortage of GPs out there. And anything that we can use to differentiate is necessary,” he says. “When you have a GP that’s turning that data over and it’s incomplete, that gives you insight into the effectiveness of their overall program.”
He adds that while StepStone has yet to decline approval of a commitment solely based on ESG factors, he expects that “we will get to that point later”.
Hester also anticipates that ESG will cease to be separated from overall investment due diligence in the relatively near future. Although StepStone made ESG a mandatory assessment point in all of its underwriting over three years ago, all prospective investments are reviewed by a responsible investment working group from one of its four asset classes of private debt, private real estate, private equity and infrastructure. Hester believes ultimately the working groups can be removed because “we want ESG to just be embedded in all the investment due diligence that we do such that we won’t need another set of eyes”.
StepStone intends to point all GPs toward the new KPIs, as well as include them in its due diligence questionnaire and underwriting. “I would hope that within a year of release, we’re seeing significant adherence in progress,” he says. “It took the reporting standards a while. But here we are, and I think ESG is moving much, much faster.”
The ESG KPIs, moreover, will be reviewed and updated on an annual basis, according to Craft. Indeed, INREV currently is undergoing the process of updating its ESG reporting guidelines, which helped to form the basis for the prioritised list of KPIs. “As we think about how ESG is evolving, what we would have asked 10 years ago, for instance, is very different than what we ask now in relation to ESG,” she says.
Caruso believes the ESG KPIs, which are still evolving, are just the beginning. “I think eventually they will become a standard somewhere down the line,” he predicts. “I see an ESG index that’s going to measure a fund’s performance against an ESG index and individual assets against the index and see how they’re doing.”
This was how NCREIF’s existing performance indices had developed, with the organisation identifying an area of performance measurement and both large and smaller players getting involved and contributing data to see how they compared to their peers. “It just builds up over time,” Caruso says. “This is the base, you need to start somewhere.”
This article first appeared in affiliate publication PERE