As GRESB reveals the results of its annual benchmark, PERE listens in as the organization’s co-founder and managing director, Sander Paul van Tongeren, talks to investors – Nicole Bradford, portfolio head, responsible investment at Cbus Superannuation Fund in Australia, which has A$3.2 billion of real estate assets under management, and Arjan van Wieren, director of private equity, infrastructure and real estate at Dutch pensions group MN – about how they use GRESB in their portfolios and how they see sustainability reporting and wider ESG considerations evolving in the coming years.

A watchful eye

van Tongeren: investors are leading the way

Sander Paul van Tongeren: GRESB is now in its ninth assessment year and the response rate from the sector has increased again in 2018. The assessment now covers more than 79,000 assets across 64 countries, representing over $3.5 trillion gross asset value. And we’ve seen an increase in the global average GRESB score, which increased to 68, up from 63 in 2017. Furthermore, 78 percent of all entities benchmarked qualify as Green Stars, up from 70 percent in 2017. Of course, this inevitably means that Green Stars are no longer necessarily the main distinguishing factor between managers; rather the GRESB Star rating (from 1 to 5) and the peer groups (same region and same sector) are the more important differentiators.

Arjan van Wieren: It’s good to see the industry adopting GRESB more and more. We also see that the quality of the data improves, and that’s important for us as an investor. Without a GRESB score, we will not invest with a manager. We’ve set clear goals for ourselves and our managers to improve GRESB scores continuously. This means we have a formal dialogue on certain areas where we think managers can improve. Looking at some of the managers we hire now, however, they’re still working to adopt and integrate better ESG profiles into their processes. We accept that it takes time, but we want to see evidence of performance gradually stepping up.

Bradford: all our property managers participate in GRESB

Nicole Bradford: All our property managers participate in GRESB. We primarily have unlisted investments in the real estate space, and that includes both direct, through our subsidiary Cbus Property, and indirect investments, through our other two pooled investment fund managers. We use GRESB information in several ways. First, it’s a really important tool for engagement with fund managers. And because we can now track trends over time, we can more easily benchmark managers and see where improvements have been made. So, in short, we use GRESB to understand the strengths of each manager and identify where they can improve. What I like is for each manager to set targets, because you don’t manage what you don’t measure.

We also use it for engagement with our beneficiaries. Cbus is the superannuation fund in Australia for the building and construction industry. Our members are working in this sector and on buildings, so it’s great for us to be able to show the impact we’re having. We report GRESB through our integrated annual report, and this year we’re also developing and publishing a corporate responsibility report.

SPvT: You referred to the importance of setting targets so that managers have something concrete to aim at. Are there particular themes you focus on, or is it more the whole ESG spectrum and whether managers improve on this?

NB: It’s both really. At a high level, we want to see an improvement in the GRESB score and how managers are tracking over time, but we do also focus on specific areas that reflect our broader responsible investment principles and our member base. Climate change is important for us to future proof our assets and the built environment fits naturally into that space. We also focus on health and safety, which is important to our members if they’re working on these building sites. We’ll look at what metrics we can use from GRESB to enhance our conversations with our managers on these topics.

van Wieren: positive about how managers are evolving

AvW: We obviously want to provide for the financial future of our beneficiaries, but also it’s important for us to play a contributing role in helping them live comfortably in the world. We have integrated ESG in our investment process and in the way we select and monitor our partners in the execution of our real estate strategy. On top of that, we focus on three themes within the real estate strategy: affordable housing; energy transition; and the circular economy. For example, we represent beneficiaries in the metal workers industry. It is important for them to have affordable housing when they retire. And we therefore feel it is part of our fiduciary duty to make sure there is sufficient available affordable housing. There is, of course, a financial risk perspective: we focus on climate risks and we’re a signatory of the Paris Pledge and we have set carbon reduction targets. It’s important for us to have a clear strategy on how to deliver these targets.

NB: One of our key overarching investment beliefs is that as trustees we can improve long-term returns for our members through active involvement in ESG issues. We think it’s important for all our investments to consider responsible investment and see this as a key strength. There’s a lot of evidence to suggest that a good responsible investment approach enhances risk-adjusted returns. We have experienced this through Cbus Property, delivering substantial returns for our members for over a decade, creating jobs for the industry and developing leading commercial green buildings. Our bottom line is providing a superannuation for our members so they can retire with dignity, if we can also create a positive environment for them to work and then retire in, and for their families and grandchildren, then that’s an added benefit for them too.

SPvT: How do you report your ESG performance and overall GRESB score to your clients and stakeholders?

AvW: We report the GRESB outcomes of the total portfolio to our clients and we’re planning to improve it continuously as the quality of data becomes better. It’s important to set clear targets and benchmark what you want to achieve, and also report back on it whether or not you reach the goals set. For each of the managers we work with, we have an extensive ESG questionnaire of which GRESB is a major part of the real estate side. But it is not only GRESB. We also use other ESG criteria that we use for every manager in the monitoring, which we also report on. In addition, we report on SDG exposure and also on the impact of our investments; this is, in our case, for example, the number of households we provide affordable housing to.

NB: We report our overall GRESB score. We want to make sure that we’re able to show progress and demonstrate how our managers are tracking. It’s also important to remember that our focus is in providing a return to our members, and we need to show that ESG initiatives support and help drive those good returns.

Leading the pack

SPvT: Something we’re often asked at GRESB is how Australia can outperform other regions. One reason, I believe, is that there is a drive from both investors and managers. Investors are really leading the way, but also the managers are super competitive, and in general they’ve fully integrated ESG across the organization. In most parts of Europe, I always have the feeling that it is mainly the investors that push for this.

NB: In Australia, the market has been developing green buildings for a long time, particularly in the commercial property space. If you were building a new commercial A-grade premium building and you didn’t build green, you simply wouldn’t be able to secure tenants. As investors this is about future proofing our assets and we’ve just committed our property portfolio to be net zer carbon by 2030. You’re also right about competition. One thing I really love to see is that our fund managers compete both against themselves to improve their GRESB scores, but also against their peers. That’s a really great way to identify areas of improvement and spur them on to do better.

AvW: The institutionalized managers are integrating ESG into their practices, but there’s still a large part of the industry that has not incorporated it yet. So, that’s true, it’s mainly driven by the investors in Europe, but I’m very positive about how managers are evolving, although most of them still have to increase their effort to improve, and it’s imperative that they do because a lot of investors are not willing to accept the lack of an ESG policy or ESG integration.

Continuous adaptation

SPvT: How do you see sustainability in private real estate evolving in the next decade?

NB: There’s a lot of focus on climate change and how to report in line with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD). Our investment committee just approved a climate change roadmap from a whole portfolio perspective. And that looks across different asset classes. The Paris Agreement and its sustainable development goals have led to a significant rise in responsible investment. Looking a little further forward, we hope to see more carbon-positive buildings.

A significant development globally is the rising importance of human rights; the social component of sustainability. In the real assets space, this encompasses issues such as labor rights and wellness. We’re just about to introduce modern slavery laws in Australia, modeled on what’s happening in the UK. We are working toward how we meet the requirements of that legislation and putting a human rights overlay across our investment portfolio and also how we operate as an organization as well.

We haven’t taken account of all 17 of the UN Sustainable Development Goals (SDG) for our property portfolio. The approach we’ve taken is to identify the goals that are appropriate for our strategy, with a focus on the built environment. That is where we feel we can make the best contribution and create additionality.

AvW: The main trend will be an increased demand to stay on the path of the carbon reduction targets in the Paris Accord. This will require greater focus on the carbon footprint of buildings. Investors will continue to raise the bar in this respect. If managers want to survive in the business, they must evolve. The SDGs will be an important part of investments going forward. We have mapped our portfolio based on where we stand on SDGs and some of our clients have also established clear goals on where they want to stand in a few years time. It means that investors like us must integrate ESG and SDG objectives in all of our portfolios. In the future, the integration of all this thinking will become mainstream. We hope it will become more and more standard practice in the markets. So GRESB is also, for us, a really important force to work with and we hope that it too will continue to evolve.