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ESG Added Value

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ESG integration is becoming more popular for several reasons. First there is the social and moral case, that reporting on performance against environmental, social and governance standards leads to better business practice in line with global efforts at tackling climate change. Second there is the more practical business case: ESG integration is a key differentiator, increasing asset value in the short term and value retention in the long term.

Not all aspects of ESG reporting will be applicable to a given company. It is important to determine the issues that are “material” or relevant to the financial performance and operations of a specific sector and carefully collect relevant data. In the case of real estate, sensors are typically used to gather data on building performance – with an emphasis on energy use and occupant experience – and this can be used to benchmark current performance and demonstrate improvements over time. This may come with an initial cost, but it maximizes value for shareholders in the long run because it ensures greater tenant attraction, lower churn rate, improved return on investment and buildings that are, in the last analysis, worth more as a result of being more future-ready (i.e. ready for changes to legislation and changes in the competitor landscape).

Asset value is perhaps the principal motivator for investors, who are willing to pay more for buildings with lower operational costs that can be guaranteed to hold their value into the future. Evidence of this demand can be found in the most recent GRESB Real Estate Assessment where participation has increased 22 per cent on the previous year. 96,000 buildings, valued at USD $4.8 trillion, were able to offer asset-level data, and energy use could be determined in more granular detail because of the prevalence of sensor-enhanced infrastructure. In comparison with previous years there was also greater emphasis on operational performance (70% weighting) as a component of the overall score.

Even so, as the authors point out, “more granular and higher quality data are necessary to provide capital markets with better consolidated ESG performance metrics.”[1] This need for greater clarity on ESG performance is a problem that has been around for a while. Analysis of active and passive strategies by Optimas suggests that not all products that integrate ESG into their investment strategies are given the proper recognition, but this is improving as tools and frameworks become available. One example would be the Carbon Risk Real Estate Monitor (CRREM) which offers investors and asset owners a set of tools to monitor and benchmark energy use and GHG emissions in line with regional legislation. CRREM is recommended in the most recent EU Taxonomy Study because it shores up trust needed for investments and underwriting of loans channeled towards sustainable and energy efficient projects.[2]

As data becomes more accurate, the link between ESG performance and financial performance will continue to drive investment. For owner-operators the search for usable data and applicable frameworks will therefore be of central importance. As one article puts it, “the conversation surrounding ESG has been going for the past ten years [but] it is now time to put it into action or risk assets becoming unsellable.”[3]

[1] Real Estate ESG Benchmark – GRESB Real Estate Assessment

[2] “EU Taxonomy Study: Evaluating the marketreadiness of the EU taxonomy criteria for buildings”, p.8

[3] https://btrnews.co.uk/build-to-rent-developments-should-ensure-esg-practice/

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