As reporting and regulation aimed at standardizing the environmental impact of real estate investment has proliferated, the correlation between value and sustainability is becoming increasingly clear.
When it comes to social impact, however, the absence of measurement and reporting standards means there is far less understanding of its relationship with value. But a tool launched this month by Fitwel, an organization that defines and certifies the health and wellbeing credentials of buildings, has been designed to bridge this gap.
Fitwel, which is operated by the Center for Active Design and Active Design Advisors, has partnered with sustainability adviser EVORA Global to pilot the launch of Certified Metrics, the first product aimed at standardizing and benchmarking the social component of ESG in real estate globally. The Certified Metrics pilot is currently in its first phase, involving existing Fitwel users that have already submitted data through the platform’s existing asset-level certification, and the tool will be available to the wider industry in 2024.
According to Joanna Frank, Fitwel’s president and chief executive officer, the product is a direct response to demand from the real estate industry for a reporting standard that demonstrates evidence of the positive financial impact of prioritizing tenant health and wellness.
“Of the 150 strategies within the Fitwel Standard that are already identified as having a significant impact on occupant health, we are now able to identify which of those strategies also have a clear impact on financial value, and therefore on long-term risk mitigation,” she explained to PERE.
The tool allows managers and their investors to assess each strategy across an entire fund or portfolio at a time, covering multiple asset types. For example, there are seven strategies within Fitwel that impact climate resilience and preparedness in the event of an emergency, said Frank, and the Certified Metrics allow an entity to evaluate how all of its assets are scoring against each strategy in that particular subset.
Frank explained there are many different ways that assets can report on an individual strategy, such as indoor air quality, but the Certified Metrics offer a consistent standard that any firm’s reporting data has to meet in order to adequately describe the risk.
“That is very important for the industry because there is a lack of consistency of understanding about what the ‘S’ metrics are, what the standard is that you need to reach in order to impact value,” she said. “We’re defining the bar, so that when people make claims about their properties, tenants and investors know there is a consistent standard out there, and that it is actually based on evidence and on that correlation to value.”
The scores of a portfolio or fund against any one social strategy or group of strategies can be benchmarked against the industry average, which Frank said is important for managers to be able to demonstrate leadership in a particular area of social impact.
The certification does not account for an asset’s direct social impact on the surrounding neighborhood, excepting where it impacts occupants of the building itself. “The value to the asset could be a community impact, such as increasing the walkability to your site by improving the sidewalks and thus improving both your asset and the community as a whole, but we are quantifying that as it relates to the increase in asset value only,” Frank explained.
Catching up with the ‘E’
One of the managers involved in piloting the Certified Metrics is PGIM Real Estate, the global real estate investment arm of US insurer Prudential. The manager is a ‘Fitwel Champion,’ meaning it commits to using Fitwel’s building-level certification for health and wellness at a portfolio scale. Deborah Teng, senior ESG program manager for the firm, told PERE the health and wellbeing component is a “crucial aspect” of PGIM’s investment and active management strategy.
“Tenants are looking for it – they want to see more rigorous standards for the health and wellness aspects of a building. It’s definitely a draw for a lot of our assets and increases their value as well.”
Teng explained that PGIM’s third-party investor clients are increasingly asking for certification on social engagement policies. “They want to see that you’re verified through another party and not just your own strategies that you’re setting. We’re getting pages of questions on health and wellbeing from investors, particularly in the US and Asia-Pacific.” In Europe, she added, questions on the social factor tend to focus on stakeholder engagement, supply chain and affordable housing instead.
For PGIM, participating in the Certified Metrics pilot is helping the firm to figure out where it should set targeted outcomes for social certification. “It’s allowing us to see across the board where we have strengths, and where there may be gaps we can then work on improving,” said Teng. “But there’s an element of education first in terms of finding out what our portfolio actually looks like against these different metrics, and then figuring out where to go from there.”
She added the certification should also help to streamline the process of responding to social indicators in regulation, such as the Sustainable Finance Disclosure Regulation in Europe, avoiding the need to “reinvent the wheel.”
Overall, being able to benchmark social metrics against peers is the next step on the path to increasing the visibility of the social component to property value, said Teng. “We’re leveling up the playing field with the ‘E’ in ESG, in a sense. It will definitely drive the industry forward.”
Other managers involved in the first phase of the pilot for Certified Metrics include New York-based BGO, Vancouver-based QuadReal Property Group and New York-based Tishman Speyer. Frank said the next group of firms will be announced in the coming months, and described them as some of “the biggest global players in real estate.”
“[Social reporting] is core business for real estate,” she said. “We’re not really having to persuade anybody this is a good idea.”