On-Demand: The Importance of ESG and Sustainability within the Real Estate Industry (Part I)

April 19, 2022

In Part I of this series, we will take a deep dive into the importance of ESG and sustainability within the real estate industry.


Transcript

Amy Menist: Thank you, Bella. Hi, all. My name is Amy Menist. I'm an auditor with EisnerAmper currently, and I have the pleasure of interviewing Danielle Barrs, who is EisnerAmper's Director of ESG Strategic Planning.

Hi, Danielle, how are you today?

Danielle Barrs: Hi, Amy. Thanks for having me.

Amy Menist: Looking forward to it. ESG has become a very hot topic today, specifically within the real estate industry. So can you explain to us why is sustainability so important and how might it impact the real estate industry?

Danielle Barrs: Of course, first of all, I love that both ESG and sustainability are in the title here. They tend to get mixed around, but there is a very important distinction, so I'm glad that, that's getting addressed first.

For a little bit of context, my background is in what you would call sort of traditional sustainability. Some folks call it CSR, which is corporate social responsibility, but essentially I have worked with very large Fortune 500 companies, public companies, private NGOs, governments, you name it, in developing roadmaps to improve their sustainability initiatives and their energy management initiatives. So I am looking at a lot of this from an environmental management and engineering lens, so it's very different for me than it might be for an economist or an accountant, let's say. That's first and foremost the lay of the land.

Essentially, I mean, sustainability has always been important. It has been for decades, and while traditional sustainability looks at initiatives to actually improve what you would call sort of ESG performance, looking at your environmental impacts, your social impacts and how us as individuals and our businesses have an impact on the environment and our communities, especially with real estate, as we will definitely talk about. Then ESG is more of the disclosure and reporting of those metrics and their ties to financial performance, which we are seeing more and more are connected. There's just no doubt about it anymore that you cannot unlink sustainability, environmental social governance, and your bottom line.

Amy Menist: Very valid. Very valid. So maybe this is actually a perfect timing to go to our first polling question so that we can get an idea of where our viewers are actually at with their ESG. So for those of you who are participating, where is your company currently at with its ESG initiatives? Are you guys still exploring, not yet started but planning to, or are you planning and objectives are in place, but it's not just executed just yet, or is a full ESG program with governing bodies and multiple initiatives underway or not a priority at this time?

All right. Let's give everyone a little bit more time. See how they're doing. It's interesting to see how all these companies have really started taking the initiative to build these ESG initiatives and how it's going to help them going forward.

Danielle Barrs: Agreed.

Bella Brickle: Yeah. All right. Well, knowing that this is a short webinar, we've got the majority of the attendees with their answers submitted-

Amy Menist: Fantastic.

Bella Brickle: So I will go ahead and close this poll.

Amy Menist: Thank you, Bella.

Bella Brickle: Yep.

Amy Menist: All right. Danielle, so what would be the first steps that you would actually tell companies that are looking to implement responsible business practices?

Danielle Barrs: Yeah, that's tough when you're looking at kind of the general landscape. So from a high level, almost always what you want to do is engage your leadership team. Form groups where you can actually get together with all of your stakeholders, and the first thing that I would do in those meetings, prioritize your risks. You go into that lead leadership meeting and decide which of those risks are most material to your business.

There are two main types of risks that we look at when it comes to what we call the low carbon transition, which is essentially decarbonizing our entire global economy, which is a huge undertaking. So we've kind of divided it into two big categories. The first is your typical transition risks. That's basically looking at the result of policies on your business, so policy changes that come with our change in climate. That might be carbon pricing or tax incentives or regulations or compliance issues. Those are all what you'd call transition risks. They all look at policies as we kind of navigate this decarbonization transition.

Then the other one is physical risks. This is very important in real estate specifically because as it relates to building assets, these physical risks are quite literally the risks that are physically impacting your business and in real estate those are your buildings. So when you look at the increase that we're seeing of extreme weather events, wildfires, drought, flooding, sea level rise, hurricanes, all of those things are going to impact wear and tear of building, building maintenance. It's really, really important for you to sit down again, with your leadership team, make sure you understand which of those risks are going to impact your business, and then I would also prioritize those by severity and frequency. What is the probability of that location being affected and your buildings being affected, and then how severe would that impact be?

That is number one is look at your risks, manage your risks, and then come up with a roadmap where you can actually go ahead and address those risks. For real estate specifically, this is so important because real estate is ... Our buildings are accountable for 40% of our carbon emissions worldwide, and so that's the big contributor to climate change is our carbon and buildings are 40% of that. It's something like 70% in urban areas. So that's a huge opportunity for the real estate industry to really be innovators in this space and to kind of lead the charge in this whole decarbonization transition.

Amy Menist: Couldn't agree with you more. Beautifully said. So maybe, Bella, that might be a perfect time to jump to our poll question, our second poll question. That's does your company currently have a corporate social responsibility, known as a CSR, sustainability report? So, yes, no, I don't know. Let's give everyone a moment.

Bella Brickle: All Right. Looks like we have the majority again.

Amy Menist: Fantastic. Thank you, Bella. So Danielle, there is a distinct difference between the environmental impact that climate and weather-related events could have on real estate versus the effect of constructing and operating real estate could have on the surrounding ecosystem. So what types of metrics and guidelines should real estate companies be using to assure that they're meeting industry and governmental standards as well as working to mitigate the risks associated with the environment?

Danielle Barrs: I like that question a lot because is it actually alludes to kind of what I was talking about earlier, which is the difference between ESG and sustainability, so really, really good thing to differentiate. First of all, what we look at as an economy and as business owners and leaders is kind of twofold. First of all, we want to look at the impact that our business has on the environment, the planet, society, communities. That's kind of what you call your impact first mentality. That is sort of what we refer to as traditional sustainability, which is what I've done the majority of.

Then the flip side of that is all of these climate risks that I talked about, all of these risks of our changing global landscape, our changing economy, the decarbonization transition, how does all of that affect our business? That is what you call a finance first or industry first mentality.

Those tend to be very different strategies, so it's definitely important to differentiate between those. When it comes to something like impact investing, which is also called responsible investing, if you want to call it that, we call that concessionary or nonconcessionary. Your concessionary kind of investment mentality is you're prioritizing your environmental impacts first, and then kind of the finances later, which is sort of what again, your traditional corporate sustainability is. Then your nonconcessionary is, "I don't want any financial sacrifice. I want to incorporate ESG initiatives, but the bottom line is absolutely first and foremost." There's no right or wrong. Everyone wants to make sure that their bottom line is there, and more and more people are trying to sort of do good. So very, very different.

In terms of sort of your frameworks and your standards. I'm going to throw out a lot of acronyms here, so I will explain them, I promise. Two big ones, TCFD and SASB. TCFD is your Task Force for Climate-Related Financial Disclosures. You probably heard that in the news, especially in the past few weeks because the SEC made an announcement they are essentially aligning with that framework, so that one's coming up more and more. Then SASB is your Sustainability Accounting Standards Boards. Now I'm pairing these two together because that tends to be your finance first frameworks. That's kind of what we associate with ESG a little bit.

Then there's two overarching impact first frameworks, which is the CDP and GRESB, and I'm bringing up GRESB specifically because it's real estate. So GRESB is your Global Real Estate Sustainability Benchmark, and then CDP is your Climate Disclosure Project. These things, they're very similar. CDP tends to be very industry agnostic, whereas GRESB is very, very focused on real state. You might look at lead designs, you're looking at kind of LEDs, lighting efficiency, HVACs, and that all decarbonizes your building, so that's why we're talking about this when it comes to the climate transition. So that's why your really impact first or financial first mentality really changes how you look at your strategy and your execution. Then again, for context, the SEC uses your TCFD so that's kind of why you're hearing that one a lot.

Another one that's really, really important ... Folks may or may not have heard about it as much when you're talking about your financial materiality, but the GRI, the Global Reporting Initiative, that's kind of your gold standard in traditional sustainability reporting. Essentially you use those standards to implement your TCFD, your Task Force for Related Climate Disclosures frameworks. These are all interconnected. I will say that in the past two or three years especially, these global frameworks, these global organizations, have done a really, really good job at slowly but surely consolidating all of these frameworks and standards. So if you look at those ones, TCFD, SASB, CDP, your Carbon Disclosure Project, GRESB for real estate specifically, and then GRI, your Global Reporting Initiative, you will be well on your way to both addressing the financial impacts and your traditional sustainability impacts.

Amy Menist: Thank you. Quite a plethora of knowledge. I'm going to have to research all those companies up later.

Danielle Barrs: It's a lot of acronyms, I know.

Amy Menist: All right. So maybe this is a perfect time, Bella, to introduce our third polling question. All right. This is our third and final. So does your company have risk management policies in place to mitigate and spearhead the environment impacts of climate change and/or the severe weather-related events? Yes, no, I don't know.

Bella Brickle: All right. I am going to go ahead and close this poll.

Amy Menist: Thank you, Bella. All right, Danielle. So sustainable urban planning and climate migration is a rising concern as long-term projections on climate forecasts and risk zones are identified. So what can real estate companies use and do pre-development to determine where and how to build for resilient long-term occupancy?

Danielle Barrs: Yeah, so the pre-development question is definitely going to pose an additional challenge to developers and the real estate industry in general. When you're looking at existing buildings, you're looking at retrofits. So just for context, if you have an existing building and you're looking at a lighting upgrade or an HVAC upgrade, or looking at your air circulation and things like that, you're kind of just going into the building and it's called a traditional retrofit. When you're looking at pre-development, you definitely come with a lot of challenges, especially as we're looking at again, this transition to our low carbon economy. I'm going to go back to kind of what I said earlier, which is look at your risk profile. That's a huge one. Risk management. We have so many unknowns now. We don't know how extreme these weather events are going to get.

I'm going to throw out a few resources. It's going to be a few more acronyms, but again, engineering and environmental management background. So a few resources that folks can use to actually start mapping out what these risks might be by location. There's actually a lot of really great organizations that will help. Flood maps look at areas of drought and wildfire risk. Again, these are really your physical risks of climate change. So we've talked about transition risks, which is policy based, but you also want to look at these physical risks, especially, especially in real estate, especially as it relates to your building assets and where you're going to build. So location, you really want to take a look at what those risks for each location is going to be.

So a few resources out there. These are free to use. This is an obvious one, EPA, the Environmental Protection Agency. Ton of resources. They have things like emission factors, which kind of vary by utility, by location, depending on kind of what electricity grid mix your building is getting or will get if you build in that area. The other one is the [OOZ] NOAA, and that's kind of where we get our weather and our climate risk. That's a really great one. World Resources Institute is a really good one. I'm listing all of these because the idea behind the pre-development and urban planning is to map out exactly where those risks are going to be. So what states, what areas, what locations are going to be high risk for flooding, for wildfires. That's going to vary.

Insurance premiums are going to be a big one. So if you are looking to build in an area where there is higher flood risk, you need to consider the insurance premiums, and that goes back to your risk management. So do you want to build in that location and kind of have to deal with the insurance premiums down the line and are tenants going to pay for it? You really have to kind of evaluate your audience and your lenders and your tenants because they're all looking at these risks too.

These are global issues. Everyone's looking at it. In the real estate industry and other industries, nobody's not looking at it. So tenants themselves who are just kind of your everyday folks who just want a place to live, residential or commercial, if you're looking for where to put your offices, especially as we kind of go back to office and we're looking at these creative ways to get people back to the office, you really want to look at where to develop. You don't want to, down the line, run into things like wear and tear that could have been prevented by using different building materials.

You really want to look at your materials in construction in addition to location, and then a really good place to start as well is looking at your both federal and local tax incentives. So DSIRE is a great database. I absolutely love that. It's D-S-I-R-E and that is specifically tax incentives and renewables for energy efficiency and solar retrofits. There's a lot of them that are federal, but a lot of them are location-based and they vary by state. So really kind of looking at what kind of incentives and tax rebates you can get will go a long way as well. Those are just kind of a few resources, but there are a ton more that are available to the public.

Amy Menist: Thank you. Thank you. To kind of actually build off of that a little bit of what you had just said, our last and final question is ESG demand is continuing to grow, as nearly 95% of millennials are interested in sustainability, and 75% believe that their investment decisions could actually impact climate change policy. So therefore, these millennials are making purchasing decisions based on their interpretation of companies' ethical and moral position, meaning that these real estate buyers and renters are requiring higher-performing properties from environmentally conscious real estate companies. So what can these real estate companies do to meet market demand, and what can they provide to buyers and renters to reassure them of their environmental impacts?

Danielle Barrs: Yeah, well, first and foremost, those statistics say a lot about where the market's going. So you have kind of the inevitable risks of this transition to a low carbon economy. But then even if you kind of take that out, you have people who are looking at places to live, who are looking to buy or rent, who are looking to invest in companies, who are part of the lending, the lending organizations, and these are people who regardless of what's happening and the global economy, they do care about this stuff. They want to see that your company is looking at social metrics, at impact on community. Things like access to public transportation that people don't really think about is going to be really, really important. Your environmental risk, again, we're talking about what's called embodied carbon, which is essentially your building materials and then operations. So embodied carbon is something like 10 or 11% of all of your carbon in your buildings. Then 60+% is your operations. So it's really, really important to kind of differentiate between the two.

So there's a few things that you can do. Let's just talk about your operations. We talked about pre-development before, and that's kind of looking at your construction materials. After you've already constructed or if it's an existing building, then you've kind of got to shift your perspective a little bit. So first and foremost, you can look at things that have a lower cost of capital or don't require extensive retrofitting. So people talk about this a lot. I kind of laugh at it now, but LED lighting is a low-hanging fruit. It's really, really easy. Things like recycling programs, onsite recycling programs, green spaces.

I recently spoke to a company that had an amazing project where they built a rooftop garden and then opened it up to the community for both existing tenants and prospective tenants. That kind of showcases their green space and their commitment to sustainability. You can put it on your website, you could use it for marketing materials. A lot of these things companies are already doing and buildings are already doing so showcase what you already have. All of those things that you're already doing. If you have green spaces, if you have refillable water bottle stations, if you are close to public transit. So millennials nowadays, they want kind of the full low carbon lifestyle. They want walkability, they want access to public transit. These are all pre-development things.

We talked about pre-development you need to look at that before when you're choosing the location and then once you get there, there are a whole bunch of things like recycling programs and lighting retrofits that you can do to existing buildings. Showcase it. We talk a lot about ESG disclosures and reporting. That's very metrics based. Your traditional sort of CSR or sustainability report, that's a really good place to showcase the initiatives that you already have. So go ahead and highlight all of the great things that you're doing, especially for those tenants that you mentioned, it's going to be a really big deal moving forward and already is.

Amy Menist: Perfect. Well, thank you so much, Danielle, I guess at this point, we'll open up the floor if anybody has any questions. All right. So Danielle, so companies are often struggling today with how to actually collect the data to support their ESG plans and their documentation on their financial statements. So how and why should real estate companies consider using technology to actually help them collect this data?

Danielle Barrs: I'm looking at the time because I could talk about this for hours. This is kind of the geek-out session for me. This is why. My background is environmental management, but I focused a lot on energy management. This idea of number one, proptech, is a huge one. You're seeing that word everywhere, which is technology used in real estate and property development. But for me, we've looked at this for a really long time in manufacturing, in transportation distribution, and also in the real estate industry because again, we're looking at building management and energy management in buildings. So this transition to low carbon economy, millennials looking at their carbon footprint, all of these things can be automated now with these amazing software and technology that we can look at.

So when you're looking at energy management technologies, you can integrate building automation systems, building management systems. Essentially what it does is it automates the collection of your energy and utility data, either straight from the utility or through meters on your buildings or plug load meters, which essentially takes usage straight from your equipment.

These are some amazing ways that technology can really help us automate this entire process. Then you can visualize all of this energy data and the purpose of this, as if looking at it and understanding your metrics isn't enough of a reason, this is the way that you prioritize your, what's called ECMs, which is your energy conservation measures. This is how you look at your proper energy efficiency initiatives, where you can reduce your carbon, where you can reduce your electricity consumption, and as if that wasn't enough, you could also reduce operating costs. Energy efficiency is a huge way to reduce operating costs. All of this can be done with some amazing softwares that we have now and proptech creations and cleantech. Really great ways. Again, I could talk about this for hours. But yeah, lots of reasons to love technology.

Amy Menist: All right. Well, thank you so very much, Danielle. It has been an absolute pleasure. I hope everyone else enjoyed the webinar as well, and I'll pass this off to Bella.

About Amy Menist

Amy Menist is an Audit Senior in the firms Real Estate Services Group and the Construction Services Group with over 10 years of accounting experience serving both public and private companies.

About Danielle Barrs

Danielle Barrs is the Director of ESG and Sustainability Solutions in the firm with over 10 years of experience in environmental management, sustainable business, corporate social responsibility (CSR), and environmental, social and governance (ESG).

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