CRE, Decarbonization and the ESG Challenge
An asset manager’s brief guide to decarbonizing properties, from Sustento Group CEO David Hodgins.
Sustainability is becoming mainstream as investors wake up to the risks posed by climate change and recognize the pivotal role their assets play in the solution.
Case in point: Participation in the Global Real Estate Sustainability Benchmark (GRESB), which was launched in 2009, grew 18 percent in 2019 alone. In 2020, more than 1,700 participants representing $5.3 trillion in assets under management reported to GRESB, which has become the go-to resource for climate-minded investors as they evaluate managers.
Growth can likewise be seen in the coalescence of investors into groups like Climate+100 and the United Nations’ Principles for Responsible Investment (PRI), which press asset managers on issues such as disclosing environmental impacts, tying executive compensation to environmental social and governance (ESG) metrics, and supporting regulations to level the playing field for early movers. Heavyweights such as BlackRock, Vanguard, and State Street have all signed the Principles, and the volume of capital involved only continues to grow.
While benchmarking ESG metrics is a critical first step, it’s not enough. With buildings accounting for about a third of carbon emissions in developed economies, the commercial real estate industry has a major role to play.
At our current pace, it would take 60 years to retrofit the nation’s commercial building stock, according to the American Council for an Energy-Efficient Economy (ACEEE).
According to the science, we only have half that time. In order to avoid the worst impacts of climate change, we must decarbonize the entire economy by 2050. It’s time we take decisive action to reduce carbon emissions from our buildings.
For the uninitiated, the veritable alphabet soup of acronyms used to describe the ESG framework may be intimidating. What follows is a brief explainer of the typical “path” we recommend to asset managers to get started:
- Establish an accurate ENERGY STAR Portfolio Manager (ESPM) account to track energy and water consumption, as well as GHG emissions. As the U.S. Environmental Protection Agency (EPA) points out, “You can’t manage what you don’t measure,” and ESPM is an important component of all the major reporting frameworks.
- Energy audits are key to an impactful ESG strategy. For an average investment of $0.10-$0.15 per gross square foot, a Level 2 Audit will identify and model a range of asset-specific energy conservation measures (capital projects), including the projected upfront investment, incentives, and savings to inform budgeting for capital expenditures. For best practices, refer to the American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Level 2 Audit Standard.
- Familiarize yourself with the regulatory landscape via the ACEEE City Scorecard Rank, which ranks the energy efficiency policies of the largest U.S. cities, such as Los Angeles’ Existing Buildings Energy and Water Efficiency (EBEWE) ordinance.
- Complete a materiality assessment to understand how climate and transition risks factor into your overall risk profile. Defined by the Global Reporting Initiative (GRI) as “the principle that determines which relevant topics are sufficiently important that it is essential to report on” and the core of any worthwhile ESG strategic plan, this assessment helps determine the organization’s most significant economic, environmental, and social impacts.
- Complete climate risk assessments using the Intergovernmental Panel on Climate Change’s (IPCC) Representative Concentration Pathways (RCPs), then consider disclosing climate-related risks using the Task Force on Climate-Related Financial Disclosures’ (TCFD) latest recommendations.
- Choose a reporting framework that best fits your business’ needs, such as the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), Carbon Disclosure Project (CDP), the United Nations’ Sustainable Development Goals (SDGs), and the United Nations’ Principle for Responsible Investment (PRI).
- Set science-based targets and seek third-party validation by the Science-Based Targets Initiative (SBTi), a collaboration between the Carbon Disclosure Project, the World Wildlife Federation (WWF), World Resources Institute (WRI) and the UN Global Compact.
- Weave the above-identified risks and standards into an annual Corporate Social Responsibility (CSR) report. To avoid the risk of being accused of greenwashing, asset managers should accomplish the aforementioned steps and establish a strong foundation in ESG before developing reports and marketing campaigns.
- Finally, benchmark and disclose your performance as part of the GRESB. After addressing the above elements, reporting organizations should be ready to receive a solid score to show investors.
In the words of Larry Fink, CEO of BlackRock: “Climate risk is investment risk. Bring the problem forward.” The clock has started on the decade of action. Now is the time.
David Hodgins is the founder & CEO of Sustento Group. Based in Los Angeles, Sustento Group works at the intersection of climate policy, construction, and real estate to help clients prepare for tomorrow by delivering value today.