As sustainability within the real estate industry continues to be a prevalent theme, the past few years have brought about more emphasis on the holistic management of environmental, social, and governance (ESG) topics.
Sustainability as a concept does overlap with the environmental component, but this move towards ESG represents a broader view of these issues and signals a need for real estate companies to begin embedding management processes into their operations.
Investors and contractual partners are increasingly requesting information on organizations’ ESG policies, programs, and performance, so it has never been more important to develop an internal program to address these areas than now. However, the challenge is that ESG programs can vary significantly among organizations, including which topics are addressed and which initiatives are implemented.
There is no single model of a “good” ESG program, but with industry-accepted processes and the development of standardized frameworks, it has become clear that there are three hallmarks that indicate a comprehensive and effective program:
When organizations begin their ESG journey, one of the most common roadblocks is determining which topics are relevant to their operations and stakeholders. Therefore, an ESG Materiality Assessment is such an effective exercise to help steer organizations in the right direction and get an ESG program off the ground. An ESG Materiality Assessment, typically facilitated by a third party, involves soliciting the feedback of stakeholders (investors, employees, tenants, vendors) regarding their expectations, priorities, and goals in this area. For example, many investors have begun integrating ESG considerations into their decision-making process and it’s also common for tenants to have certain ESG requirements, such as energy efficiency performance, when evaluating real estate options.
By engaging with these stakeholders, an organization can gain insight into the specific ESG factors that each group is prioritizing and understand what initiatives they may expect to see implemented. Materiality Assessments often include a review of competitors’ ESG programs as well as an analysis of potential reporting frameworks to ensure that the organization compiles a complete view of the ESG landscape within their real estate market.
Once an organization has identified which ESG topics need to be managed, the next step is to develop a strategy for implementing initiatives. A key component of executing any ESG strategy is to develop a process for tracking metrics and establishing targets. For real estate, this often includes the utilization of a software solution to track utility consumption at an asset level. This level of granularity will also enable an organization to identify which assets have the most opportunity for improvements, such as energy consumption or greenhouse gas emissions reductions.
On the social and governance side, data tracking is likely relevant at the corporate level with example topics of board diversity, employee training hours, or charitable contributions. Once baselines have been established with various E, S, and G datapoints, annual or multi-year targets can be set and made public to display accountability to an organization’s stakeholders. Having a service provider or designated FTE(s) to collect and manage these ESG data points will then be necessary to track progress and handle any external reporting.
A major milestone in any organization’s ESG program is the participation in some form of public disclosures. It’s an opportunity for the organization to provide transparency to stakeholders, benchmark its performance, and deliver updates on ESG goals. However, all disclosures are not made equal and it’s an area where many organizations can, whether intentionally or not, make claims that could be seen as “greenwashing”. This is where alignment with reporting frameworks can provide credibility by ensuring that organizations have met specific standards and have reported in a thorough manner.
Because of the number of available frameworks, it can be difficult to know which is the best option for an organization. Consider the intended audience, the subject matter (climate change disclosures, human capital disclosures, etc.), and whether the organization is looking to benchmark its performance. For example, an organization that is looking to benchmark its performance against its peers and provide a rating to its investor base may look to participate in the Carbon Disclosure Project (CDP) or the Global Real Estate Sustainability Benchmark (GRESB).
An organization that is looking to prepare a report for a general audience that highlights ESG metrics and case studies may benefit from using the Global Reporting Initiative (GRI) standards to refine its content. It is increasingly common for organizations to utilize multiple frameworks as a part of their annual ESG reporting cycle, but it’s important to understand the time and resources required to do so before undertaking any significant disclosure process.
For more information and expertise on ESG for commercial real estate, contact our RPS team.
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