ESG Benchmarking and Reporting for the Real Estate Industry: Who Wants ESG Data and Why

ESG is not just a box to be checked as part of due diligence. With the proposed SEC reporting regulations, as well as investor interest in ESG, collecting and reporting on real estate ESG and sustainability data is crucial. As such, real estate companies need a way to measure and report on its ESG strategy. 

ESG Benchmarking 

The Global Real Estate Sustainability Benchmark (“GRESB”) is an international membership organization that assesses ESG performance of real asset portfolios. It is the leading global ESG benchmark specifically designed for the real estate industry to help investors and managers understand and measure a company’s performance on the ESG and sustainability initiatives within its portfolio. The organization provides standardized and validated ESG data to the capital markets, including institutional investors in real estate.  

The goal of the GRESB Assessment is to capture the most material ESG data related to the sustainability performance of real estate. Depending on the property, GRESB’s Real Estate Assessment generates one of two benchmarks: the GRESB Real Estate Benchmark, which considers management and performance factors used for existing and operating real estate (aka “Standing Investments”); or the GRESB Development Benchmark, which considers management and development factors used for new construction or properties undergoing major renovations.  

ESG Reporting Frameworks and Standards 

Real estate companies have several reporting frameworks and standards available to help them disclose information about their ESG efforts. These standardized frameworks allow companies to provide transparent data and properly disclose their material risks from climate change to achieve compliance.   

• Global Reporting Initiative (“GRI”) is a sector-agnostic sustainability reporting standard for stakeholders, with a focus on impact materiality.  

• The Carbon Disclosure Project (“CDP”) is a non-profit that collects data and content for climate related reporting, with a focus on impact materiality.  

• The Sustainability Accounting Standards Board (“SASB”) is a sector-specific reporting framework geared towards investor and capital providers, with a concentration on financial materiality.  

• The Task Force on Climate-related Financial Disclosures (“TCFD”) is a climate-related risk disclosure of the financial impacts of ESG risks,. It’s important to note here that the proposed SEC climate disclosure rule is modeled on the framework created by the TCFD.  

Double Materiality: Financial Impact vs. Environmental Impact 

The SASB defines material issues as those “that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to an investor.” Financial materiality is a measure of the relative financial impact of a factor surrounding a company’s ESG considerations and position. Financial materiality looks inward at a company to assess how the organization’s ESG decisions could influence stakeholder decisions or affect the business long-term. Its primary audience is investors and assesses outside-in impacts, meaning the effect climate change has on the company.  

Impact materiality, also known as environmental and social materiality, focuses on the external effects of a company’s activities on the environment and communities. Impact materiality looks outward at the environment to assess how the company’s ESG decisions could influence the climate. Its primary audience is consumers, civil society, employees and investors. It assesses its impacts on an inside-out basis, meaning the effect the company has on climate change.  

Risk of Improper Reporting and Greenwashing 

 Overstating or misrepresenting ESG metrics can lead to regulatory fines and reputational damage. For example, Deutsche Bank’s DWS unit, one of the world’s leading asset managers, experienced a 26% drop in share value following a raid based on allegations of greenwashing. Additionally, BNY Mellon was fined $1.5 million by the SEC for ESG misstatements and omissions.  

Who Wants ESG Data and Why? 

Regulators 

ESG initiatives are gaining significant attention among regulators and the Biden administration due to a rise in the necessity of, and public interest in, sustainability. While regulations currently vary by state and local government, there are also incentives available at both state and federal levels to help make the initial investment to implement ESG and sustainability initiatives more appealing. The Inflation Reduction Act includes $370 billion for energy and climate spending. This can be in the form of federal tax credits, such as the 179D and 45L for construction, as well as the 45Y and 48E. Furthermore, The SEC Climate Disclosure Rule would require public companies to disclose climate-related risks that are reasonably likely to have a material impact on their business, operations or financial position. It would also require them to disclose the company’s greenhouse gas emissions (and an attestation report over Scope 1 and Scope 2 emissions for the large, accelerated filers). 

External Stakeholders 

ESG is shaping and influencing real estate valuation and therefore gaining importance among capital providers. Although not a deciding factor, a business’s ESG plans can significantly affect investor and lender decisions. Businesses that are forward-looking and have sustainable business practices in place are attractive to investors, who want to be certain the company is developing sustainable plans to combat the effects of climate change, reduce costs, attract tenants or buyers, create ways to support the community, and properly set, monitor and report on the company’s goals.  

Real Estate Companies 

High-performing buildings are not only good for the environment, but they are also good for the bottom line. Although capital is needed to build or retro-fit properties, companies that invest in ESG initiatives often see a quick return because high-performing buildings attract higher occupancy rates, thereby generating more revenue and decreasing the amount spent on utilities and insurance premiums. 

 With the correct reporting framework, along with guidance from an ESG consultant, real estate companies can develop a strategy for reporting around ESG and sustainability to gain competitive advantage, mitigate risk and exposure, improve financial performance and attract investors.