ESG + Real Estate + Benchmarking

Curious whether ESG is still a major force in commercial real estate? The last few weeks have seen a flurry of sustainability and ESG-related events from coast to coast, such as Climate Week NYC. Don’t let those headlines about some states pulling their funds out of ESG-focused investments fool you. According to data from PwC, asset managers around the globe will hit $33.9 trillion of ESG-related investments under management by 2026.

At the heart of all sustainability and ESG projects is measurement: understanding how well your asset or portfolio is doing in these areas. The next step after simple measurement is benchmarking your performance against others in the industry.

In this newsletter edition, we’ll take stock of the state of ESG benchmarking, explore how real estate companies are using this data, and share some expectations for where we expect the field to go.

ESG measurement benchmarks to know

ESG, or Environmental, Social, and Governance, are business factors outside the bottom line. Covering everything from sustainability under the E to diversity and inclusion under the S and board oversight under the G, ESG factors are very important to various property stakeholders. They can impact property value in a range of ways, and 89% of investors surveyed by Capital Group said they consider ESG factors.

Tenants also consider sustainability when making location decisions. CBRE found that LEED-certified offices carry a 31% rent premium over non-certified buildings. Furthermore, research from the UK found that for 49% of leaders at large office occupiers, sustainability “very much” impacts their space decisions. In practice, buildings that rank well in terms of sustainability tend to control for heat loss with the right insulation, multi-pane windows, and efficient HVAC systems. They also minimize water waste through installation of low-flow or, in the United States, WaterSense-labeled products. Other touchpoints include AI building systems which can automatically adjust lighting and temperature across entire offices or malls.

LEED is one of many ESG certifications that cover various scales of focus from individual components of specific properties to the firm level. At the property level, LEED is the most famous certification in America, stretching back to the 90s and with over 100,000 certified projects. LEED offers specific designations for achievement in building sustainability, planning, and related areas.

GRESB is another standout, and more of a true benchmark. Instead of just conferring certifications to properties that meet a list of criteria, GRESB allows owners to analyze their performance against those of their competitors. Crucially, GRESB also allows investors to view the ESG performance of participating fund managers, allowing them to base investment decisions on actual ESG data in context.

Impacts of ESG

Properties that prioritize ESG command greater values than those that do not. There are several reasons for this.

Impacts to NOI

Many technologies with a clear sustainability use case result in improvements to NOI as well. In a recent survey of American companies, environmental services firm Veolia North America found that 40% of respondents considered reducing operating expenses a very important factor for them to consider sustainability efforts. Indeed, altruism aside, there are deep financial benefits to ESG efforts. According to Ernst & Young research, green buildings carry a 10-21% value premium over their non-green counterparts.

Impacts to capital expenditures

Alongside NOI impacts, monitoring ESG performance can help property companies decide on capital expenditure decisions. Clarity into building performance can offer data-driven decision-making, for instance, whether to focus on improvements to HVAC or building envelope.

Market factors

Beyond just looking at direct determinants of property value, ESG monitoring helps companies hit the ESG goals of their cities. Around the world, governments at different levels of regulation are enacting sustainability requirements, penalizing firms that do not comply or rewarding those that do. The classic reference here is New York City’s Local Law 97 (LL97), which assesses fees to properties that exceed a specific carbon emissions limit. LL97 was enacted in 2019, and despite recent moves to give some owners more time to prepare, it remains the standard for building climate regulation. Colorado’s recently-approved Regulation 28 takes a similar approach at a state level.

Trends to watch

Keep an eye on these key areas:

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Will we see consolidation of certifications/benchmarks?

On one hand, it’s possible that the large number of certifications out there could wind up consolidating down into a handful of clear leaders which use their scale to bring standardization to the market. This would result in less choice for property companies, but potentially more of a unified playbook for owners to follow.

Or will they specialize?

On the other hand, it is also possible that different benchmarks will become focused on specific areas. ESG is a big field, and even within the “E” alone, there are many different factors to consider. This is the take favored by Patrick Staunton, JLL UK’s Ratings and Standards Lead.

Competition between established players and upstarts in related ESG tech

Just as benchmarks themselves may experience some consolidation, the surrounding tech landscape will adjust to reflect the changing landscape. One area to watch is competition between existing providers of sustainability, and upstarts in the field. Because the field is still so new, young companies have an opportunity to provide novel solutions and successfully compete against entrenched competitors, which might themselves be either older startups or parts of large engineering/building service firms.

Greater deployment of ESG measurement tools across portfolios

In the future, expect to see an increasing implementation of tech tools to enable real time monitoring of sustainability and ESG performance. This includes sensors, IoT systems, and platforms that enable better intra-organizational communication.

Greater ESG competition between owners

More and more owners are disclosing their ESG efforts in their annual reports and investor correspondence. These disclosures make it easier for specific ESG performance points to become competition focus points, like amenity packages already are.

Conclusion

ESG measurement is increasingly instrumental for commercial real estate owners, occupiers, and investors. Performing well in this area means higher rent, greater valuations, and more liveable spaces. However, a true lingua franca for sustainability is elusive, with a range of different benchmarks and performance monitoring tools. Whether or not consolidation comes to ESG benchmarking, expect to see greater data standardization in the future.

With visibility of 19k emerging technologies and our global lens, our ability to assist portfolio owners is unique. Whilst also being curated specifically for your need.

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