Concrete Change: How ESG is Revolutionising Real Estate

‍With a staggering 39% of all global carbon emissions attributed to the construction and operation of buildings, the Real Estate sector has come under the ESG spotlight.

Sustainability risks, including stricter regulatory requirements, evolving societal preferences, and climate-related events, have made buildings increasingly vulnerable. Furthermore, these structures are exposed to the impacts of flooding, water scarcity, and extreme weather conditions. The financial repercussions can be devastating and escalating insurance claims underscore the urgency for sustainable practices in the real estate industry.

Investors now demand greater transparency and risk awareness in an effort to reach Net Zero targets, pushing for the integration of ESG principles into real estate management and reporting.

So what does a more sustainable future in real estate look like? In this blog post, we will explore key topics shaping the future of ESG and ESG reporting in the Real Estate sector, including:

• Frameworks for Real Estate
• Key ESG Reporting Metrics in Real Estate
• ESG Developments in Real Estate - Biodiversity
• The Future of ESG reporting for Real Estate

Frameworks for Real Estate

Today, ESG frameworks like the GRESB and TCFD are shaping how real estate companies approach and report their sustainability performance.

Global Real Estate Sustainability Benchmark (GRESB)

Founded in 2009, GRESB was designed to provide real estate investors and managers with a robust framework to enhance transparency and improve sustainability performance. In particular, GRESB is comprehensive, covering various dimensions of sustainability, including but not limited to: energy efficiency, carbon emissions, and social responsibility.

The utilisation of GRESB has experienced significant growth in recent years. In 2022, there was a notable 20% increase in global participation compared to the previous year, with the Americas region leading the way with a 30% year-over-year increase, followed by Europe with a 16% increase.

Benefits for companies using GRESB include:

• Improved ESG performance
• Identification of areas where they may fall behind peers and develop strategies for improvement. 
• Recognition of climate-related financial risks and opportunities, allowing managers to proactively address them. 
• More effective engagement with investors using objective and GRESB-verified ESG data.

Benefits for investors using GRESB include:

• Increased ability to assess and compare the ESG performance of various assets and portfolios. 
• Informed investment decisions that consider ESG risks and opportunities. 

The steady growth and influence of GRESB highlights its increasing relevance in driving ESG transparency and driving positive change in the investment and infrastructure sectors.

The utilisation of GRESB has experienced significant growth in recent years. In 2022, there was a notable 20% increase in global participation compared to the previous year, with the Americas region leading the way with a 30% year-over-year increase, followed by Europe with a 16% increase.

Task Force on Climate-Related Financial Disclosures (TCFD)

Similarly, the adoption of TCFD has gained significant momentum in the UK. Established by the Financial Stability Board, the TCFD framework provides a comprehensive and globally recognised set of recommendations for climate-related financial risk disclosures. These recommendations are structured around four thematic areas: governance, strategy, risk management, and metrics and targets.  

Starting in 2021, premium-listed companies were required by the Financial Conduct Authority to align their climate-related disclosures with the TCFD's framework or provide a written explanation for non-compliance. Additionally, the Financial Reporting Council has emphasised that UK public interest entities, including institutional investors and pension schemes as real estate asset owners and managers, should routinely report against the TCFD's 11 recommended disclosures and the relevant Sustainability Accounting Standards Board (SASB) metrics for the Real Estate sector. 

It is worth noting here that the IFRS Foundation’s new sustainability standards, S1 & S2, incorporate both TCFD and SASB pillars and the organisation will oversee corporate TCFD disclosures from 2024. 

TCFD adoption holds several benefits for real estate companies, investors, and other stakeholders:

• Risk Management: By conducting scenario analysis for climate-related risks, real estate firms can better understand the strategic implications of climate-related risks and opportunities such as physical threats to property from extreme weather or transition risks from shifting regulations and market demands.
• Strategic Advantage: Real estate companies can use climate-related disclosures as a tool for strategic planning and building a sustainable business model. For example, knowing their building portfolio's energy efficiency can aid in strategic decisions around retrofitting, investments in renewable energy, or seeking green certifications.
• Investor Relations: Transparent reporting based on TCFD recommendations can improve investor confidence, by helping companies demonstrate their proactive approach to managing climate risks and their commitment to sustainability.
• Informative Decision-Making: With enhanced disclosures, investors can make more informed decisions on capital allocations and better evaluate climate-related risks and opportunities.

To learn more about ESG frameworks, check out Nossa Data’s article on the top ESG/Sustainability frameworks.

Key ESG Reporting Metrics in Real Estate

Energy efficiency and carbon emissions: 

Buildings contribute to 39% of global energy-related carbon emissions: 28% from operational emissions and 11% from materials and construction. Therefore, energy efficiency is crucial in reducing operating costs, particularly in light of recent energy price volatility.

Indoor air quality: 

Post-pandemic, tenant health and wellbeing have become paramount concerns. Many countries and regions have regulations and standards concerning indoor air quality in commercial buildings. In addition, many sustainability certifications, such as WELL Building Standard place significant importance on indoor air quality. Meeting the criteria for these certifications demonstrates a commitment to environmental sustainability and occupant well-being.

Occupancy rates: 

Not only do high occupancy rates often signal a desirable location and effective management but contextualised intensity data reporting, such as emissions per square foot or metre, might not provide the most accurate picture anymore. Combining occupancy data with energy and management metrics offers a clearer assessment of a building's performance, leading to more accuracy in evaluations.

Energy Performance Certificates (EPC): 

Although Commercial EPC (CEPC) and Residential EPC (REPC) remain crucial as energy performance certificates, green building certifications such as Leadership in Energy and Environmental Design (LEED) and Building Research Establishment Environmental Assessment Method (BREEAM) elevate the standards for sustainable construction and operation, inspiring eco-friendly building practices worldwide.

Combining occupancy data with energy and management metrics offers a clearer assessment of a building's performance, leading to more accuracy in evaluations.

ESG Developments in Real Estate - Biodiversity

While the metrics mentioned above offer important insights into the ESG aspects of a real estate portfolio, the landscape of sustainability is continuously evolving. One such emerging area, which is reshaping ESG consideration in real estate, is biodiversity.

In November 2023, the UK will introduce the Biodiversity Net Gain (BDG) regulation, which will be applicable to developments under the Town and Country Planning Act 1990, unless exempt. Starting from April 2024, it will also apply to small sites.

BDG will affect land managers, developers, and local planning authorities (LPAs). Crucially, for developers, the regulation mandates efforts to avoid habitat loss on the land where development work is planned. If this is not feasible, they must create habitat either on-site or off-site. On-site refers to the development land, while off-site can be the developer's own land elsewhere or units purchased from a land manager.

If neither on-site nor off-site solutions are possible, developers must purchase statutory credits from the government. This option should be considered as a last resort, and evidence must be provided to support its use. The government will invest in habitat creation in other parts of England using the funds from these credits. BDG ensures that development projects prioritise biodiversity preservation and promote ecological balance for a sustainable future in real estate.

The Future of ESG Reporting for Real Estate

The adoption of frameworks like TCFD and GRESB are indicative of a broader shift in the real estate industry toward sustainable practices, risk management, and transparency in ESG reporting. Moving forward, the landscape of ESG reporting in the real estate sector is set to evolve further, driven by upcoming regulatory changes such as the Corporate Sustainability Reporting Directive (CSRD).

Set to bring about significant changes, the Corporate Sustainability Reporting Directive (CSRD) will affect a multitude of companies in the sector. Real estate actors such as real estate investment trusts (REITs) and developers, will need to disclose their ESG policies, targets, and performance while providing assurance on their sustainability reports.

The implementation of CSRD aims to:

• Enhance transparency and comparability of sustainability information across the real estate industry. 
• Enable investors, regulators, and other stakeholders to assess the sustainability risks and opportunities associated with different companies and assets.
• Drive greater accountability and promote sustainable practices within the real estate sector.

The evolution of ESG reporting in the Real Estate sector is apparent, and with frameworks like GRESB and TCFD, as well as upcoming regulatory changes such as the CSRD, firms are faced with an increasing need to enhance their transparency and sustainability efforts. The potential benefits of doing so extend beyond regulatory compliance, encompassing improved risk management, increased investor confidence, and enhanced stakeholder relations.

Navigating these complexities can be challenging, yet advancements in modern technology can play a crucial role in easing this process. ESG reporting software, for example, can streamline the data gathering and reporting process, enabling firms to effectively monitor their progress, set achievable targets, and make data-driven decisions for a sustainable future.

The journey toward sustainability in the real estate industry is ongoing, but the progress made so far is promising, and the potential for future strides is significant. As the ESG reporting landscape continues to evolve, so too will the opportunities for the real estate sector to drive sustainability, resilience, and value creation.

Sources:

• The power of GRESB: Driving change in the real assets industry
• Bringing embodied carbon upfront
• Understanding biodiversity net gain
• ‍ESG - How does the CSRD impact the real estate sector?