ESG in real estate: reliable data and standardised frameworks critical to accurate reporting and longer-term success
It is increasingly acknowledged that for progress to be made in ESG practices, the real estate sector must take it seriously. With real estate thought to be responsible for around 40% of global emissions and energy consumption, sustainability within the sector is key to the UK meeting its ESG targets.
Within this context, the role of reliable ESG reporting is critical; detailing the impact that a company’s activities have on the planet and identifying what progress they are making towards their ESG goals.
The majority of UK private companies are not currently legally obliged to make ESG-related disclosures. This has meant that, to-date, most ESG reporting has been on a voluntary basis. However, with ESG law and regulation developing quickly, this position is expected to change. New mandatory ESG reporting requirements will directly affect public and larger private companies and are designed to cascade through investment and supply chains, permeating the entire private sector.
In addition to direct legislation, real estate companies are also experiencing growing pressures from the market to report on their ESG outputs. Many real estate companies have made public ESG commitments and are under scrutiny to evidence their progress. Investors, lenders, tenants and employees want to see that companies ‘walk the talk’ and accurate ESG reporting is central to this.
Against this backdrop, there is growing pressure on all the sector to engage with ESG reporting. There are, however, various challenges facing companies wanting to do so:
Navigating the reporting framework minefield
The ESG field is crowded and there are currently a wide range of different reporting frameworks and accreditations. This can create uncertainty about what companies should be reporting against and how to do this.
Using an established ESG framework such as the Global Real Estate Sustainability Benchmark (GRESB) can provide a structured evaluation of ESG factors. But some established frameworks might not be suited to a company’s business and therefore some companies prefer to create bespoke ESG frameworks or use more than one framework for their ESG reporting.
As different frameworks can lack standardisation, it can be extremely difficult to compare the reported results. To tackle inconsistency, there is a real need for a reliable and standardised approach to ESG reporting across the real estate sector.
Mind the ‘data gap’
Obtaining consistent and reliable building data is essential for real estate companies wanting to report on ESG across their portfolio. Understanding how much energy a building is consuming is crucial and enables the company to benchmark and identify operational improvements.
One of the main challenges for ESG reporting in the real estate sector is access to reliable data. This is particularly true with older buildings and those where tenants are reluctant to share information relating to their energy usage. Without access to this information – the ‘data gap’ – it is difficult to see how companies can accurately report on ESG.
This highlights the need for collaboration between landlords and tenants. The inclusion of ‘green lease’ clauses in leases can require tenants to share data with landlords and for the parties to work together to understand and improve the environmental performance of the building. Green lease clauses or other similar commitments set out in a Memorandum of Understanding can be vital tools in addressing the ‘data gap’ challenge. There is also growing demand for a regulatory requirement for tenants to authorise utility companies to share consumption data with landlords which could help bridge this gap significantly..
Technology can also be very useful in addressing this challenge. A smart building management system is able to capture comprehensive and detailed building data as well as enable the optimisation of building systems which improves efficiency.
ESG reporting as a business priority
Unlike financial reporting, ESG reporting is relatively new, and for many companies, it won’t form part of their general operations. At a corporate level, there can be resistance to investment in the reporting tools and training needed for accurate ESG reporting, particularly when there are competing business priorities.
ESG reporting is complex and can be both time-consuming and costly. However, the pressure on real estate companies to be transparent about their ESG performance is growing. With increasing transparency requirements, companies should take care to ensure the accuracy of the information they publish in their reporting to avoid accusations of ‘greenwashing’ which can have major reputational and financial implications.
Whilst it remains to be seen exactly what level of ESG reporting real estate companies will be subject to in the future, the demands on companies to make disclosures are only expected to increase. In this context, it is prudent for companies to prioritise it now to avoid behind left behind.
An edited version of this original article also appeared in Property Week.