A variety of options are on the table for REIT sustainability reporting.
Nowadays, there’s about a dozen or so real estate sustainability standards competing for the attention of investors, according to RealFoundations, a real estate consulting firm.
There are BOMA 360 by the Building Owners and Managers Association International, Global Real Estate Sustainability Benchmark (GRESB), Sustainability Accounting Standards Board (SASB) and AccountAbility’s AA1000 series. There are the Global Reporting Initiative (GRI) and CDP, formerly known as the Carbon Disclosure Project. Meanwhile, there are building certification programs such as LEED, BREEAM and Green Star. There are also 30 or so ranking and index systems, such as Forbes, MSCI, Asset4, Climate Counts and CSRHub. All the names, systems and methodologies are enough to make an alphabet soup. In terms of reporting, programs have different coverage periods and deadlines, making life more difficult for sustainability managers wrangling how to best distill data related to energy, sustainability and governance (ESG).
For REIT sustainability managers, compliance reporting for a growing number of systems has come down to triage of sorts, with real-estate-specific platforms getting top priority. This all comes in addition to a company’s work on its own sustainability report for investors. “There are a lot of reporting frameworks out there, and a lot of them are very time consuming,” says Sara Neff, senior vice president of sustainability at Kilroy Realty Corp. (NYSE: KRC).
With no consensus on standards, REITs and other companies have had to deal with multiple survey requests and also the tailored requests of their own investors. That said, it’s a two-way conversation, says Hans Op ’t Veld, head of listed real estate for PGGM, a Netherlands-based institutional investor with significant U.S. REIT holdings. “It is something that is not only up to the companies to figure out, but also on the part of the investors to find common ground there and establish a way of communicating,” he says.
While a universal standard may be a long way off, sustainability is becoming a more important part of operational focus for many REITs. This only increases the need for common reporting standards and disclosures. All of the methods and approaches have good intentions, focusing mainly on reduction of energy consumption, greenhouse-gas emissions, water consumption and waste generation. However, what information is disclosed, how it is collected and presented, and the level of detail necessary remain up for debate, and will be hashed out in the years to come.
What’s not up for debate are the potential consequences for REITs that ignore the issue. For one, investors are paying closer attention to sustainability. While there haven’t been instances yet of divestitures based on lack of sustainability programs at a REIT, the increasing quantification of the science could mean that day will eventually come.
Fortunately for REITs, a good starting point has been the GRESB framework. GRESB uses an annual survey to benchmark sustainability performance of real estate and infrastructure companies. Yet, with so many competing standards, REITs have had to work to make sure the unique attributes of real estate get included on other platforms.
But SASB is just one platform. Given the fast proliferation of ratings systems and indices, there’s worry about reputation risk with sustainability ratings firms. “It’s the responsibility of companies to make sure what they are reporting on you is accurate,” Neff says.
New products keep emerging. RebecoSAM, an asset manager focused on sustainability investing, and S&P Dow Jones in April announced the launch of the S&P ESG Index Series. It’s designed to measure the performance of companies in its respective underlying index with a weighting methodology based on an ESG score. The index series is based on RobecoSAM’s annual corporate sustainability assessment, which covers more than 2,000 companies in the major indices, and uses an online questionnaire and company documentation. Another platform includes Bloomberg, which provides ESG data on more than 11,000 companies with over 700 ESG indicators, using company-sourced filings and third-party information, covering virtually the entire publicly investable universe.
With REITs, the good news is industry leaders have developed some common practices of their own. For one, many use the Environmental Protection Agency’s Energy Star Portfolio Manager software to measure and track energy and water consumption and greenhouse gases.
AccountAbility, a global consulting firm that specializes in corporate responsibility and sustainability, has worked with NAREIT for the past year to study and refine best practices suited to the REIT industry. In an interview now available on REIT.com, AccountAbility CEO Sunny Misser discusses the results of AccountAbility’s analysis, key takeaways from the exercise and broader trends in corporate responsibility.
Yet, a common thread among various sustainability methodologies is an emphasis on working with tenants. One of SASB’s metrics requires listing the percentage of tenants that are separately metered or submetered for electricity and water. It also has a qualitative metric for describing the approach to measuring, incentivizing and improving the sustainability metrics of tenants.
While platforms exist, the triple-net leases often mean a manually intensive process, where managers must request the utility bills of their customers. “We have to go through an effort to ask them for their bills and enter them into a data management platform to look at them year over year to see how they are performing,” says Jeannie Renné-Malone, vice president of sustainability for Prologis Inc. (NYSE: PLD). When a tenant moves out, REITs like Prologis have the opportunity to negotiate a green lease clause in order to have the right to collect utility data. But new tenants can lead to another wrinkle if they consume more energy, something that’s also outside of the landlord’s control, Renné-Malone notes.
Nuances like these are part of the appeal of a standard such as GRESB and its real estate focus, since it allows for explanations.
GRESB, whose funding comes in part from large institutional investors, also favors transparency over performance, as it’s hard to make comparisons among the REITs. For example, a 2 percent reduction in energy use for Kilroy is an accomplishment, Neff says. But for a REIT that’s embarked recently on the management of energy, 2 percent might not be so impressive.
“From an investor standpoint, how do you differentiate what number is good? It’s very hard to compare apples to apples,” she says.
GRESB is also working with partners to ease the process of collection and reporting. NAREIT’s Leader in the Light Award program was embedded in the GRESB survey in 2012, whereby the GRESB survey accounts for 70 percent of an applicant's score, with the remaining 30 percent coming from a set of supplemental questions. Another example is an export button within Portfolio Manager’s software to GRESB, which quietly was rolled out last year. Data from 9,000 of 60,000 assets came through the automated data pipes last year, says Chris Pyke, chief operational officer of GRESB. This year, he expects the number to rise to as much as 27,000.
A law passed in 2015 authorized another program aimed at creating incentives for building tenants to adopt sustainable practices. The Energy Efficiency Improvement Act of 2015 created Tenant Star, which recognizes tenants and building owners working together to reduce energy usage in leased spaces. The Environmental Protection Agency is currently working on developing criteria and options for Tenant Star assessment.
REITs just getting up to speed in sustainability need to work with what’s out there and forge their own path, Stanford says.
“There is a connection between overall management quality and success in sustainability,” Neff says.