ESG frameworks for real estate: A 2023 guide
Discover real estate ESG frameworks in 2023 to enhance your real estate company's sustainability. Pros, cons, and a list of key frameworks are outlined in this blog.
ESG frameworks for real estate are taking on even more importance in 2023 as green investment soars and issues around the environment, government and social responsibility take the spotlight.
To help real estate companies respond to these challenges and ensure sustainable business practices going forward, a range of ESG frameworks have been developed.
In this blog, we outline a few - so you can decide which framework is the best fit for your organisation.
The business case for ESG in real estate
- Enhanced risk management: ESG frameworks help identify, anticipate and mitigate potential risks associated with climate change, regulatory compliance, labour practices, supply chain management, diversity, and more.
- Improved financial performance: Companies that integrate ESG factors into their strategies tend to demonstrate better long-term financial stability, reduced volatility, and increased profitability. Research conducted by the Harvard Business School found that high sustainability performance correlated with better financial performance.
- Access to capital: Do investors care about ESG? Yes! Investors, including institutional investors and asset managers, are increasingly considering ESG criteria when making investment decisions. Adopting an ESG framework can make a company more attractive to investors, expanding its access to capital. ESG-focused institutional investment is projected to reach US$33.9 trillion in the next 2 years.
- Stakeholder engagement and trust: The ‘governance’ part of ESG is often overlooked but constitutes an important development in the way companies are run. ESG frameworks promote transparency, accountability, and engagement with stakeholders, including employees, customers, communities, regulators, and investors.
- Innovation and competitiveness: You know how it goes, competition drives innovation and vice versa. And in the area of ESG - both of these are rampant.
Companies that prioritise sustainability and social responsibility are more likely to identify emerging market trends, anticipate regulatory changes, and capitalise on new business opportunities. By integrating ESG into their product development, companies can stay ahead of evolving customer preferences, reduce costs, and gain a competitive edge in the market.
- Long-term value creation: ESG frameworks encourage a long-term perspective, aligning business strategies with the broader goals of sustainable development. By integrating ESG factors into decision-making processes, companies can create value not just for shareholders but also for society and the environment.
- Lack of standardised metrics and reporting: ESG frameworks often lack uniformity in metrics, methodologies, and reporting standards. This presents a challenge for companies looking to accurately compare and benchmark their performance. The absence of consistent reporting may also lead to discrepancies and inconsistencies in how ESG performance is assessed and evaluated.
- Data collection and reporting challenges: Collecting and reporting ESG data can be resource-intensive and complex, particularly for real estate companies with extensive operations. Companies may struggle to collect accurate, comprehensive, and reliable data across their value chain. This challenge can be further compounded by the need for data verification and assurance to ensure transparency and credibility.
- Short-termism and greenwashing: Some critics argue that ESG frameworks can lead to short-term thinking and superficial measures as companies focus on meeting specific ESG targets to enhance their image. This may result in "greenwashing," where companies prioritise cosmetic changes without making substantial improvements to their underlying practices. To avoid this, adopt a meaningful approach to sustainability. Do not simply pursue ESG metrics for appearance's sake.
- Limited scope and subjective assessments: ESG frameworks tend to prioritise certain factors over others, potentially overlooking critical issues or providing subjective assessments. Different frameworks may focus on different aspects of ESG, leading to inconsistencies and gaps in coverage. Additionally, the assessment of ESG factors often relies on qualitative judgments and interpretations, which can introduce subjectivity and variations in evaluations.
A list of ESG frameworks in 2023
The Global Real Estate Sustainability Benchmark (GRESB)
The Global Real Estate Sustainability Benchmark (GRESB) is a widely recognized and industry-leading benchmark for assessing the sustainability performance of real estate portfolios and assets worldwide.
Key points about GRESB:
Assessment Framework: GRESB provides a standardized assessment framework that allows real estate companies, funds, and developers to report on their ESG performance. The assessment covers various aspects, including energy efficiency, greenhouse gas emissions, water usage, waste management, health and well-being initiatives, diversity and inclusion practices, and governance policies.
Data-driven Analysis: Participating entities submit data related to their sustainability efforts, and GRESB uses this data to evaluate and benchmark performance. The information collected helps investors, stakeholders, and the market at large to gain insights into the sustainability practices of real estate entities.
Global Participation: GRESB has a global reach, with thousands of real estate companies, funds, and assets participating in the annual assessment process. It covers a diverse range of property types, including commercial, residential, industrial, and more.
Investor Focus: GRESB is primarily aimed at institutional investors who want to incorporate ESG factors into their investment decisions. By providing standardized and comparable data on sustainability performance, GRESB helps investors identify more sustainable and responsible investments.
Performance Benchmarking: GRESB scores entities based on their sustainability efforts and ranks them relative to their peers. This allows companies and funds to gauge their progress over time and strive for continuous improvement.
Transparency and Accountability: GRESB promotes transparency and accountability in the real estate sector by encouraging companies and funds to disclose their ESG-related information and commitments.
Building Research Establishment Environmental Assessment Method (BREEAM)
BREEAM is a framework that evaluates the environmental, social, and economic performance of buildings. It does so by assessing the energy efficiency, water conservation, waste management, indoor environmental quality, ecological impact, and social responsibility exercised by a particular company.
Real estate companies can use this framework to demonstrate a commitment to sustainable development through their building projects.
It culminates in a certification process, which involves an assessment of the building's design, construction, and operational aspects. Based on the points earned across different categories, the certification level is awarded, ranging from "Pass" to "Outstanding."
BREEAM serves as a recognized benchmark for sustainability. It also enables stakeholders to make informed decisions about the environmental and social impact of their buildings.
The WELL Building Standard
The WELL Building Standard is a performance-based system for measuring, certifying, and monitoring features of the built environment that impact human health and well-being. It is administered by the International WELL Building Institute (IWBI) and is designed to enhance the quality of life and health of occupants in buildings. The standard covers various aspects of building design, construction, and operation, with a focus on promoting health, comfort, and productivity.
Key features and concepts of the WELL Building Standard include:
Categories: The standard is organized into seven categories, known as concepts, which address specific aspects of occupant health and well-being. These categories are Air, Water, Nourishment, Light, Fitness, Comfort, and Mind.
Preconditions and Optimization: Each concept includes preconditions and optional optimizations. Preconditions are the minimum requirements that must be met for certification, while optimizations are additional strategies that can earn extra points toward higher levels of certification.
Performance-Based: The standard is performance-based, meaning that buildings are evaluated based on actual outcomes rather than just design intent. Performance is measured through on-site testing, surveys, and other methods to ensure that the building is delivering the intended health and well-being benefits.
Continuous Monitoring: The WELL certification is not a one-time event. To maintain certification, ongoing monitoring and reporting of building performance are required. This approach encourage building owners and operators to sustain healthy environments over the long term.
Collaboration: The standard encourages collaboration among stakeholders, including building owners, designers, contractors, and occupants, to optimize the health and wellness outcomes of the building.
Fitwel is a building certification system and rating tool that promotes health and well-being in buildings. It was developed as a joint initiative of the U.S. Centers for Disease Control and Prevention (CDC) and the General Services Administration (GSA). Fitwel assesses various aspects of the built environment that impact human health and provides guidelines for improving these factors to create healthier spaces.
Fitwel complements other building certification systems like LEED and the WELL Building Standard, providing additional options for creating healthier and more sustainable environments. It has gained popularity among building owners and developers looking to prioritise the well-being of their occupants and align their properties with health and wellness best practices.
Key features of Fitwel include:
Evidence-Based Strategies: Fitwel's recommendations are based on scientific research and studies that demonstrate the positive effects of certain design and operational features on occupant health and well-being.
Customizable and Scalable: Fitwel can be applied to a wide range of building types, from offices and multifamily residential buildings to schools, retail spaces, and healthcare facilities. It offers a flexible and scalable approach to address the unique needs of each building.
Point-Based System: Fitwel uses a point-based system to evaluate a building's health-promoting features. Building projects can achieve one, two, or three-star ratings based on the number of points earned.
Focus on Multiple Factors: Fitwel considers various factors related to health, such as physical activity opportunities, access to healthy food options, natural daylighting, indoor air quality, and support for mental well-being.
Continuous Improvement: Fitwel encourages continuous improvement by allowing buildings to recertify every three years, giving owners and operators the opportunity to make further enhancements and updates.
Other ESG frameworks to consider
The Carbon Disclosure Project (CDP)
CDP is an international nonprofit organisation that assesses companies' environmental impact, specifically focusing on carbon emissions.
Buildings can negatively impact the environment through poor energy efficiency and embodied carbon. It’s therefore important for real estate companies to make efforts to track and mitigate these emissions.
Real estate companies can disclose their carbon emissions and climate-related risks through CDP's reporting platform. This framework enables benchmarking and comparison with industry peers.
The Equator Principles (EP)
The EP is a risk management framework adopted by financial institutions for assessing and managing environmental and social risks in project financing.
Real estate companies involved in large-scale projects, such as infrastructure development, can utilise the Equator Principles to ensure sustainable and responsible project planning, design, and implementation.
The International Integrated Reporting Council (IIRC)
The IIRC promotes integrated reporting, which combines financial information with ESG performance indicators to provide a holistic view of a company's value creation strategy.
Real estate companies can adopt integrated reporting practices to demonstrate the interconnections between financial, environmental, social, and governance aspects of their operations.
Choose a framework that works for your company
These frameworks are a way to make your company more sustainable, improve investor confidence, and work towards a better future.
That said, it’s not as simple as ticking the right boxes. Real estate companies should approach ESG with a sense of meaning and authenticity.
That means being transparent about their efforts and tackling challenges head-on. It's all about creating a sustainable legacy that will make their competitors go "Wow!" and leave a positive impact on the world.