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Driven by investor and regulatory pressure, the real estate business has been one of the early adopters of ESG. In this resource-intense sector that contributes 50% of global resource consumption, 36% of energy consumption and a large share of the labour market, ESG risks as well as opportunities abound for the real estate ecosystem.
While environmental considerations top the list of ESG concerns in the real estate industry, the social aspects of built environments are growing as another point of focus, especially after heightened public health awareness post-pandemic. Numerous sustainability certifications and ratings such as LEED, BREEAM, and the exclusively health-focused WELL and Fitwel have proliferated the market of real estate players that want to demonstrate sustainable leadership, whether for compliance, financing, or marketing reasons. In addition, the EU taxonomy poses a particularity for real estate companies having to report on a portfolio of multiple buildings and projects.
Many look to the Global Real Estate Sustainability Benchmark (GRESB) as the standard bearer for ESG criteria. Whatever benchmark you choose, ESG for real estate is complicated by end-use consumption - the footprint of tenants or occupants that are outside the direct control of building operators and asset owners. Energy and water consumption represents a significant footprint in built assets. Green buildings reduce the resource intensity of consumption, but even if a masterplan incorporates design and engineering efficiencies, consumption data is still heavily influenced by occupant usage patterns. This leads to another challenge: collecting data on tenant resource consumption is a demanding undertaking. Same goes for waste management - state-of-the-art facilities are only as good as their utilisation rates.
The built environment has a high exposure to climate risks and is particularly prone to physical risks such as extreme weather events, rising sea levels and coastal erosion. MSCI’s Climate Value-at-Risk (VAR) is a measurement of real estate companies’ exposure to climate risks in financial terms. Coastal and low-lying assets are projected to face up to 20% depreciation in value due to climate impacts. Of all the ESG aspects, climate poses the biggest risk to real estate. Asset owners and managers will have to navigate the fairly new climate disclosure landscape in response to the increasing importance of climate resilience and adaptation strategies.
To that end, the net-zero movement for the real estate sector has been gaining momentum, championed by the World Green Building Council’s Net Zero Carbon Buildings Commitment. Tracking carbon emissions along the real estate value chain is a process involving a thorough lifecycle impact assessment, from embodied carbon (arising from construction and development materials and activities) to operational emissions (from usage consumption) and compensation of residual emissions that could not be avoided or reduced.
The whole life carbon approach runs central to the challenges of ESG data management in real estate, as it highlights the complexity of the business, both upstream and downstream, and the multitude of stakeholders involved. Building and construction accounts for 38% of global carbon emissions annually. Decarbonisation of materials is a key strategy in reducing emissions, and this will play in to effective procurement and resource management policies - an ESG data point for which transparency may be hindered by concerns over competitive advantage.
As regards the EU taxonomy, buildings built before 31 December 2020 must have at least an Energy Performance Certificate (EPC) class A. As an alternative, the building is within the top 15% of the national or regional building stock expressed as operational Primary Energy Demand (PED) and demonstrated by adequate evidence, which at least compares the performance of the relevant asset to the performance of the national or regional stock built before 31 December 2020 and at least distinguishes between residential and non-residential buildings.
Occupational health and safety of construction workers is a major issue in an industry with a large network of contractors and subcontractors. The many layers of subcontracting makes it difficult to detect modern slavery in the labour force.
On the end-use side, designs built with health and wellness concepts in mind require data on indoor air quality, ventilation, comfort, community, etc. and their impact on occupant wellbeing. These aspects are harder to measure and define due to their subjective nature, although industry scoring frameworks or certifications exist to provide guidance on managing the data.
Strong governance of ESG data is the biggest data challenge for corporate governance, and for that matter, all industries. Data collection processes throughout the entire real estate value chain, accuracy and impartiality of information, ownership and accountability… data is needed for decision-making to drive compliance and risk management and the challenge lies in design and implementation of an effective data management strategy.