This year marks a decade since the launch of GRESB, the ESG benchmark for real assets, offering global real estate managers a way to benchmark the sustainability and ESG performance of their assets and investments. To mark the occasion, PERE took the opportunity to speak with GRESB co-founder and managing director Sander Paul van Tongeren, and representatives from two of the original institutions which launched GRESB, Patrick Kanters, managing director global real assets at APG Asset Management, and Mathieu Elshout, senior director, private real estate, PGGM Real Estate. The group discussed how the sector has made progress in meeting sustainability commitments and what the focus needs to be to drive forward the sustainability agenda in the next decade.
Looking over the past decade, what progress has the private real estate investment sector made with regard to ESG issues?
Sander Paul van Tongeren: Over the past 10 years, ESG has gone mainstream and GRESB has been instrumental in this. There were 1,005 property companies, REITs, funds and developers participating in the 2019 Real Estate Assessment. This is the 10th consecutive year of participation growth. Ten years ago, 18.7 percent of participants collected energy data. In 2019, it is 97.7 percent. In 2009, 13.1 percent of participants used renewable energy; in 2019, it is 61.2 percent.
So in terms of performance, we are seeing a big change. Nearly all – 94 percent – of investors actively reach out to their managers to request participation in the annual GRESB Assessment. It is this strong demand from asset owners for greater ESG transparency that drives action and, ultimately, more sustainability practices among investment managers.
Mathieu Elshout: ESG has become mainstream in the real estate sector, although there is more room for improvement. I am quite proud of the industry’s progress, but there is still a lot to do, of course. Looking back, 10 years ago there was simply no instrument or objective way available to us of measuring the ESG performance of our investments. Since then, the industry has really changed. So GRESB has become the one way to assess ESG performance, and we have seen performance increasing over that period of time, as well.
Patrick Kanters: Global industry standards were something the sector really needed. Now, sustainability awareness has increased and companies continue to score higher on the GRESB survey metrics every year. Of course, as investors we want to outperform the average scores. We first had to work on the coverage within our portfolio, and we made it mandatory for all our investments. I am sure that is why we have seen great progress. We can track the performance of our own portfolio against the GRESB benchmark, enabling us to discuss with managers and operators their individual performance.
The benchmarking really gave a push to the managers because they didn’t want to be underperforming compared to their peers. We have seen a huge increase in performance over time. One other way to show you what has changed is that 10 years ago we very often had to request for sustainability to be put on the agenda of the boards and committees we serve on. That is very different these days, where it is common practice to discuss these matters.
Other than GRESB, what other developments have made the sector sit up and realize the importance of sustainability?
ME: Organizations such as INREV have launched guidelines which require their members to report on ESG measures, such as the ESG strategy of their funds and how they have performed against targets. The fact that the real estate industry itself has adopted reporting guidelines has been extremely helpful in improving the transparency and culpability of funds. We have also seen regulators, governments and central banks focus more on ESG and require more detailed reporting on ESG.
SPvT: The Task Force on Climate-related Financial Disclosures has helped move the needle, with a clear focus on resilience. A lot of real estate companies are now tackling climate risk and resilience and determining whether they are exposed to extreme weather events. That is also why we introduced the GRESB Resilience Module, because we feel this addresses a very important issue. Around 25 percent of resilience module participants report having a comprehensive program, which demonstrates the need for progress here.
Does it remain a challenge to quantify the impact of ESG on real estate investments?
PK: A key development is that companies are no longer questioning whether sustainability will come at a cost. There is a general conviction that sustainability actually mitigates risk and can drive returns going forward. There is evidence that sustainable buildings will command higher rents. However, I think from an overall basis it is still difficult to prove. Ultimately, assets should move toward complying with the Paris Climate Agreement and achieving net-zero emissions. In time, valuers will take sustainability more into account, but managers should not wait until that point; it will be way too late.
SPvT: The short answer is yes. It remains a challenge to quantify social impact on performance. For example, it is difficult to assess the indoor air quality of office buildings and link that to higher productivity levels of those who use the office space. Furthermore, there are no commonly accepted indicators or metrics that measure the positive impact of real estate on local communities in terms of GDP growth or job creation. There are a few thought leaders, mainly in the UK and Australia, who have started to measure social impact. However, this is really the exception. For environmental metrics, it’s different. There are commonly accepted indicators when it comes to water, waste, energy and carbon, and the vast majority of fund managers are able to report on these metrics.
ME: There is mounting evidence that sustainability is adding to returns or reducing risk. But it is difficult because you need a long series of data before you find real evidence. At PGGM, we started off 10 years ago with a belief that sustainability pays off. We still believe this, but it is difficult to single out sustainability, because you can find funds which perform well on the GRESB assessment but underperform on their real estate benchmarks. Our portfolio, which this year again scores very high on the GRESB benchmark, has certainly been outperforming over the longer term.
Can social initiatives have a positive impact on performance?
SPvT: The GRESB 2019 real estate assessment shows leading companies have structured their health and well-being programs to include consideration of employees, tenants, communities and supply chains. But health and well-being programs are not yet standardized. Although the social part of ESG is extremely important, the difficulty is quantifying the social impact on performance. But there has been good progress on measuring tenant and employee satisfaction levels and, over time, I am convinced we will also be able to measure the social impact and performance at the asset level, community, portfolio and even at the fund level. It will take some time though.
PK: Success will only come with being able to standardize and have a common language in which to talk about these issues, and this still needs further improvement. But I am also convinced the sector will get there. There is increasing evidence of a correlation between a healthy environment and the improved learning capacity of children and also higher work productivity. No doubt the focus on this area will continue to increase.
ME: We do not want to single out investments as being impact investments because I feel we would then be lacking focus on the rest of the portfolio. So rather than focusing on impact investing itself, or on the social aspects separately – although of course they are very important – we again look at them as an integral part of ESG.
Taking a look ahead now, what further progress needs to happen in the next decade?
PK: We need, as an industry, to take a very strong line on the Paris Climate Agreement and to comply with it. That is going to lead to much more information about properties in order to compare them one by one with regard to the pathways which lead to the Paris Climate Agreement. That is ultimately what will need to happen and will be important as countries introduce regulations supporting the agreement.
ME: Climate change is really crucial to us. We want to bring our portfolio in line with the Paris agreement, so we see a transition risk if we are not in line with the pathways that lead to compliance. This is a growing focus for us. As for the physical risk, as long-term investors we need to take a longer-term view on this matter. We own real estate that we may want to sell in 10 years’ time to a buyer with a 10-year ownership horizon, which means we need to be concerned with at least a 20-year timeframe over which to consider the resilience of the asset.
SPvT: We face a number of global challenges: the climate crisis, ecosystem breakdown, mass extinctions, extreme income inequality, political instability, mass migrations and demographic changes, and we have much work ahead of us. However, because of the strength of our movement, because of the commitment to transparency by thousands of managers around the world, because of institutional investors embracing the UN Sustainable Development Goals (SDGs), we can be optimistic that a sustainable real asset industry is within our grasp. Nonetheless, it will be a challenge. In fact, I think the next 10 years will be more challenging than the past decade.