Climate Risk Readiness White Paper

September 22, 2020/in Data, Sustainability /by Sonny Masero

1. Why is climate change such an important investment risk for investors in real estate & infrastructure?

A summary of the factors driving change in the real asset markets.

In early 2020, before the pandemic hit, BlackRock’s Larry Fink called out the fact that “Climate Change is Investment Risk”. Three paragraphs of his annual letter stood out, highlighting the connection between material climate risk, their impact pathways, and the drivers of asset value:

“Will cities be able to afford their infrastructure needs as climate risk reshapes the market for municipal bonds? What will happen to the 30-year mortgage – a key building block of finance – if lenders can’t estimate the impact of climate risk over such a long timeline, and if there is no viable market for flood or fire insurance in impacted areas? What happens to inflation, and in turn interest rates, if the cost of food climbs from drought and flooding? How can we model economic growth if emerging markets see their productivity decline due to extreme heat and other climate impacts?

“Investors are increasingly reckoning with these questions and recognizing that climate risk is investment risk. Indeed, climate change is almost invariably the top issue that clients around the world raise with BlackRock. From Europe to Australia, South America to China, Florida to Oregon, investors are asking how they should modify their portfolios. They are seeking to understand both the physical risks associated with climate change as well as the ways that climate policy will impact prices, costs, and demand across the entire economy.

“These questions are driving a profound reassessment of risk and asset values. And because capital markets pull future risk forward, we will see changes in capital allocation more quickly than we see changes to the climate itself. In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.”

On its own, this proclamation from the CEO of the world’s largest asset manager might have created a few ripples in the investment markets, but not create a wholesale market transformation. However, the letter sandwiched an unprecedented period in the history of mankind’s battle with climate change. At the end of 2018, the UN Intergovernmental Panel of Climate Change (IPCC) published a Special Report on the impact of global warming of 1.5°C, which provided a stark warning about the consequences of inaction on climate change. In the period between these two events, several other activities took place which reinforce the market change:

Public opinion about the need to act on climate change shifted significantly in favour of action, in no small part to the meteoric rise in popularity of Greta Thunberg’s ‘Fridays for Future’ school children protests and the disruption caused by other campaign groups, such as Extinction Rebellion (XR) protests, and legal class actions brought forward by student groups around the world.
Climate science and the quality of climate modelling continues to improve, with recent work showing that the likely outcome of global warming will be between an average global warming of 2.6°C and 3.9°C. This is well above the low-risk threshold of 2°C agreed at the 2015 Paris Climate Summit (COP 21) and the preferred target of 1.5°C.
Significant capital reallocation towards delivering ESG objectives happened during 2019 and continued into 2020.

These factors, combined with new and forthcoming government regulations, would suggest that climate change and broader sustainability (or Environmental, Social & Governance) issues are here to stay for investors. Their material impact on financial returns is starting to become better understood as more time and money is invested in improving our knowledge and its application in real asset investment markets. Ignorance of these issues is no longer an excuse.

The way in which climate risks are being understood is in 3 categories:

Physical risk
Transition risk
Litigation, or Liability, risk

For physical risk, the first step is to understand which climate-related hazards present a material risk, both now and over the period of an investment, including the disposal value. For instance, the materiality of a flood hazard could increase over time as climate change creates the conditions for more frequent and/or more severe floods causing damage or disruption to an asset. The impact pathway for that hazard could be that the repair costs and frequency of the floods means that an asset becomes uninsurable. Another impact pathway could be that the flooding makes it impossible to access an asset, which in turn reduces occupancy and the related revenue that generates.

The complex nature of the changes brought about by our warming climate means that the risk hazards and impact pathways could influence the drivers of asset value in multiple ways.

Whilst some of these material risks are apparent today, there are many others which will become much more visible over the coming decade. The trends that we see which could accelerate changes to asset value include: increased environmental & social disruption; increasing government regulation; and the internalisation of these costs to mitigate climate change and to adapt to the consequences. Companies and asset managers need to be prepared to avoid the risk of litigation.

2. What are the expectations for how investors and asset managers will respond to climate risks?

There is increasing certainty about how to be prepared to action.

Climate-related financial risk is a new topic for investors. In 2015, Mark Carney, as the Governor of the Bank of England, gave a speech which warned of the threat of climate change to financial stability. He spoke of the “Tragedy of the Horizon” where inaction on climate change today imposes a cost on future generations that the current generation has no direct incentive to fix. Meaning that the time horizon for decision-making in typical business and investment cycle is not suitable for tackling the catastrophic impacts of climate change.

Earlier in the same year, the G20 asked the international Financial Stability Board (FSB) to report on how climate change risks could be accounted for in the financial sector. Both of these events were precursors to the UN Climate Summit (COP21) in Paris later that year. The international political agreement reached at COP21 was a watershed for international climate policy as governments agreed that a target of limiting global warming to 2°C is a necessity to avoid catastrophic changes and that getting well-below this figure was desirable, so 1.5°C is the stretch target. To achieve this target collectively, we need to stabilise greenhouse gas (GHG) emissions, measured in tonnes of carbon dioxide (CO₂) equivalent, by 2050 – also known as getting to Net Zero Carbon or being Carbon Neutral by 2050. Failure to do this will mean that the Earth will continue to warm and the financial losses will be much greater.

This growing recognition that climate change and the related financial risks have to be considered in the financial markets led to the announcement during COP21 to establish a Task Force on Climate-related Financial Disclosures (TCFD) under the auspices of the FSB and chaired by Michael Bloomberg. The TCFD will develop voluntary, consistent climate-related financial risk disclosures for use by companies and asset managers in providing information to investors, lenders, insurers, and other stakeholders. Considering the physical, liability and transition risks associated with climate change.

One year later the TCFD published its Recommendations for consultation, which were finalised by the summer of 2017. Over the last 3 years since the Recommendations were released there has been considerable efforts made by the FSB-TCFD to build support for their adoption by actors in the financial markets. Recognising that preparing an organisation to embed a comprehensive response to climate-related risks could take 3 years.

In parallel to this promotion of TCFD over the last 3 years, GRESB has been piloting a Climate Risk Module as part of their annual disclosure and benchmarking process specifically for real estate and infrastructure. Other international Environmental, Social & Governance (ESG)/Sustainability reporting standards have also promoted more effective consideration of climate risks and preparedness.

Every year the UN published an Emissions Gap Report. In 2019, the report stated that we need to reduce global GHG emissions by 7.6% every year between 2020-2030. If we don’t start that level of reduction now, then by 2025 we will have to reduce emissions by 15.5% every year to hit the target and this will be more costly and still necessary. The later that we leave act to mitigate GHG emissions, the higher the annual cost of mitigation action and the increased likelihood of increase cost of adaptation to a changed climate. Many companies have now adopted science-based targets aligned with the UN to reduce emissions and to get to zero. Governments are following suit.

The Recommendations of the TCFD are not requirements, they provide voluntary guidance intended to help companies acting in the financial markets to better manage and disclose climate-related financial information. There are four key design features of these recommendations:

They can be adopted by all organisations
They are intended to be included in financial filings
They are designed to solicit decision-useful, forward-looking information on financial impacts
They have a strong focus on risks and opportunities related to the transition to a lower-carbon economy

As investors and asset managers consider how climate risks can be considered in their organisations, the TCFD core elements shown below provide a useful structure for getting the organisation ready to disclose the relevant financial information. The TCFD recommendations should be familiar in structure to CFOs and are reinforced by a recent opinion from IASB which recommends that IFRS reporting should include climate risk disclosure. This is almost a precursor to action on individual assets as the structure allows for a strategic approach to be systematically embedded in risk management and then embedded across all levels of the organisation, from corporate through entities / funds, investment, disposal, development and asset management processes.

EY’s ‘Global Climate Risk Disclosure Barometer’, which reviews the disclosure of 500 companies from 18 countries, shows mixed progress in 2019 in the adoption of the TCFD recommendations. Most progress has been made on ‘Metrics & Targets’ and ‘Governance’, whilst the quality of ‘Strategy’ and ‘Risk Management’ are the least developed. Their sector by sector comparison shows that the ‘Real Estate’ and ‘Asset Owners & Asset Managers’ sectors have made the least progress, in terms of coverage and quality. Suggesting that there is significant progress to be made by real estate investors and asset managers to be ready to manage and report on climate-related financial risks.

Whilst the TCFD Recommendations are voluntary, they are a precursor to mandatory disclosure in Europe resulting from the EU ‘Action Plan on Sustainable Finance’. At least for publicly listed companies and funds. Regulations which begin in 2021 will start this process of increasing disclosure.

The EU Taxonomy Regulation has set out a standard set of environmental impact categories, including Climate Mitigation and Climate Adaptation. This Regulation has established the principle of Do No Significant Harm (DNSH) and has set thresholds for what a ‘Significant’ positive impact looks like. It is expected that companies active in the EU will provide disclosure aligned to this taxonomy and it will provide investors with a common lexicon to use in global due diligence and in the scrutiny of fund performance as we experience more capital flowing into ESG funds.

3. How can a company ensure that they are prepared as an organisation to discharge their fiduciary duty?

There are clear steps that can be taken to be prepared to manage climate risks.

EVORA Global advises real estate and infrastructure investors and asset management in Europe and the USA who have global funds, with assets under management in over 30 countries. Our experience with these organisations has shown that there is a broad spectrum of Climate Risk Readiness. From the largest to the smallest they are considering how they respond to climate-related financial risks. They are having to do so now to ensure that they have access to the best capital.

To get ready, an organisation can undertake a Climate Risk Readiness Gap Analysis, which can be displayed on our EVORA Climate Risk Readiness Radar and compared to their peers. This assessment looks at the organisational readiness and is aligned with the TCFD Recommendations and upcoming regulations. It can be supplemented with fund and asset-level scoring of climate risk exposure and management readiness.

The EVORA Climate Risk Readiness Radar provides an evidence-based scoring mechanism to compare progress. Under each of the five categories – Governance; Strategy; Risk Management; Metrics & Targets; and Disclosure – there are five levels of organisational readiness, and each level has an associated set of actions. For instance, Level 1 Governance required all Board member are trained to understand their fiduciary duty regarding climate risk, including their main materials risks and disclosure responsibilities and requirements. The associated set of actions includes a risk materiality assessment of the organisation’s assets; formal training for the Board; and a declaration by the Board that all of its members have confirmed their understanding.

By understanding this gap analysis of organisational readiness, it is then possible to set out a roadmap for the coming years. This will enable the organisation to communication a clear plan to investors and other stakeholders.

Level 1 Strategy contributes to Level 1 Governance as it requires an assessment of material physical and transition risks through the use of climate scenario analysis. This should be segmented by time horizon, geography and/or sector. As this modelling is a standard requirement for getting to grips with climate risk there are several data analysis software tools now available on the market. The EVORA team has been evaluating which specialist data analysis partner to work with.

The majority of data services available today are focused on analysing physical risks, like the extreme weather impacts of heat, flooding and storms. Our approach to assessing the materiality of physical risks, and to answer the question “so what?”, is in three broad phases:

A portfolio or fund screening of a range of weather hazards to prioritise a deeper investigation of the high-risk assets,
An assessment of the impact pathways to create a shared understanding of how the hazard risk could impact the drivers of asset value, and
A detailed investigation and assessment at asset-level of the specific, material hazards which impact value and are prioritised from 1 & 2 above.

These three phases provide a deeper understanding of risk than a high-level screening can provide. The intention is that this provides a detailed evidence base on which to define a credible, effective and appropriate climate risk strategy and the related processes for risk management. Both of these areas of climate risk management are presently considered weak in most company disclosures.

Today, there is not an existing data partner which can deliver on all three of these phases end-to-end so we collaborate with specialist partners to deliver a comprehensive Climate Risk Materiality Portfolio Assessment service for fund managers. EVORA usually extends this assessment to also cover Transition Risks, in particular forthcoming regulations which could affect value.

These two EVORA Assessments on Readiness and Materiality are essential building blocks in understanding the effort and exposure for an organisation’s preparedness on climate-related financial disclosure. The outputs will provide a clear roadmap for integration over the next few years.

Investor expectations of climate risk have moved on quickly over the last few years. Our expectation is that this acceleration in understanding and scrutiny will continue. Reinforced by new regulations, particularly the regulations flowing from the EU Action Plan on Financing Sustainable Growth and Paris’ climate mitigation goals, ever-improving climate models and continued emissions of greenhouse gases which are not in line with a Net Zero Carbon trajectory. Those investors who are not prepared are much more likely to acquire assets which are at risk, that is not aligned with science-based decarbonisation pathways and/or exposed to a changed climate. The need for organisational preparedness, embedded across all aspects of investment – i.e. asset management; acquisitions; developments; and disposal – is essential portfolio management. Good quality data and information is vital in delivering expected returns in a market which is transitioning to become low-carbon and adapted for a changed climate.

EVORA is engaging with companies and relevant institutions to better prepare the real estate and infrastructure sectors for climate mitigation and adaptation disclosure. The approach outlined in this paper is difficult to fast-track in large organisations to ensure it is properly integrated. One of the biggest challenges which remains is solving the ‘Tragedy of the Horizon’ as this means that the actions required in an investment portfolio cannot always be taken within the investment lifecycle. The TCFD initiative is designed to address this challenge and, to be successful, this requires early and comprehensive adoption by real estate actors. We would recommend to our clients that early action on climate risk reduces the risk of Litigation or Liability Risk, as well as falling disposal values of asset exposed to Transition and Physical Risks. The steps outlined here will guide substantial and measurable progress.

EVORA’s Climate Resilience Service

Embodied Carbon and its Role in Achieving Net Zero Carbon

September 18, 2020/in News & Views, Sustainability /by Michael Norton

Embodied Carbon accounts for the total greenhouse gas emissions released to the air as a result of constructing a building
Commitments have been made to achieve Net Zero Carbon by 2050, Embodied Carbon must be considered and reduced to achieve this
Climate change poses a number of financial risks
Embodied Carbon studies can increase climate resilience and therefore reduce risk and increase return

What is Embodied Carbon?

Have you ever walked past a building site and wondered where all the materials have come from? Whether the timber began life as a tree in the UK or abroad? While I was on work experience on one of my Father’s building sites, I found the idea that materials from potentially all around the world have come together to make something new, fascinating. I wondered about the work and energy that went into getting them onto the building site; first the raw materials are extracted, then transported to an industrial site where they are processed into a product, then transported again to the construction site and finally put into place. At each of these stages, energy is consumed and therefore emissions of greenhouse gases are released to the air (measured as emissions of CO₂ equivalent, in this article, ‘carbon’). As such, each individual building material has a certain amount of carbon associated with it – the emissions released as a result of that product’s life. These emissions are the embodied carbon of the product, and as a wise person once said, ‘One brick does not a house make’, so the total emissions from all of the products and processes that go into making a building, form the total embodied carbon of that building.

The embodied carbon during construction, along with the operational carbon during the building’s life, such as energy used for HVAC, in addition to the end of life activities such as demolition or deconstruction – depending on where the system boundary is considered – all sum to the total carbon that is released as a result of the building’s life. Accounting for and reducing total carbon emissions has never been more important as the effects of anthropologic climate change continue to devastate parts of the world.

Why is Embodied Carbon becoming more important?

Following the Paris Agreement in 2015, governments around the world agreed that climate change must be limited to ‘well below 2⁰C’, and in our industry a figure of 1.5⁰C has been widely adopted as the target maximum ^[1]. This can only be achieved by countries and industries achieving a balance between carbon emissions and carbon sinks, resulting in the amount of carbon released to the atmosphere totalling ‘Net Zero’, by 2050 ^[2]. These commitments are binding, and increasingly severe fines will be issued to those who emit excessive carbon. To be successful, is it vital that governments and companies alike create pathways to Net Zero, to plan the transition to a decarbonised future and ensure that this future aligns with a 1.5⁰C trajectory (see figure 1). It is also important to consider both the total volume of emissions and the rate at which they are released, therefore change must happen in the short term, as sudden reductions in 2040 for example, will not be as successful in limiting the impact of climate change ^[3].

*Figure 1: Global Warming Projections* **^[12]**

In commercial real estate, 23 of the leading commercial property owners have committed to becoming Net Zero by just 2030, under the Better Building Partnership Climate Change Commitment ^[4]. Under this agreement, scope 3, or all other greenhouse gas emissions that occur due to its activities, but which it has no direct ownership or control over, are also included, which covers embodied carbon. With current technology, generating embodied carbon through construction is unavoidable, therefore the only options to balance embodied carbon are to reduce it as much as possible, then offset the rest.

What are some of the risks posed by climate change?

The EU Emissions Trading Scheme operates under a ‘cap and trade’ principle, meaning although offsets can be brought, they will be capped and reduced over time and eventually there is a risk that offsets will no longer be available, or the prices be too high to be economically viable ^[5]. Similarly, in the voluntary offsetting market, there are a finite number of projects delivering offset ‘credits’, and over time, the low hanging fruit will be depleted so that financing projects becomes ever more expensive. This could lead to the more significant risk of fines being imposed for excessive emissions, along with a carbon tax on the remaining embodied carbon. Furthermore, although industry leaders have placed more responsibility on themselves to improve climate resilience and reduce emissions, there is a transitional risk that regulation will change in the future, leaving some assets stranded. For example, regulation could restrict the use of inefficient technologies or improve carbon accounting and bring more sources of emissions into scope. Should companies refuse to act now and continue with business as usual, they risk being caught out later and be forced to make sudden adjustments to align with new regulations, which could prove extremely costly. Such regulations include the draft new London Plan policy GG6: Increasing efficiency and resilience ^[6], this policy requires those involved in planning and development to improve energy efficiency and support the move to a low carbon circular economy. As such, planning permission could be refused to developers who do not align to this policy.

The requirements around disclosing climate resilience and environmental performance is becoming more commonplace, the Taskforce for Climate-Related Financial Disclosure (TCFD) is increasing transparency in this area by requesting organisations disclosure their climate-related financial risk publicly ^[7]. While currently voluntary, emerging Sustainable Financial Disclosure Regulations mean that this is unlikely to stay this way long term. There is therefore a reputational risk that stigmatisation of poor climate resilience could grow, and negative stakeholder feedback could arise. This in turn could prove material should a company lose out on investors because of this, who will be aware of the various financial risks climate change poses and view these as investment risks.

The physical risks of climate change will also be material for any entity with physical assets, which includes real estate, property could be damaged, for example by increased rainfall or flooding, or induce additional operating costs, for example higher temperatures leading to increased use of HVAC equipment, thus requiring additional maintenance. Therefore, it is in the best interest of the industry to limit the physical effects of climate change by sticking to a 1.5⁰C trajectory, where is it widely reported that these risks will be more significant at 2⁰C and above ^[3].

It must be noted that there is risk in adopting new technology, as it is unknown how that technology will perform in the long term and could have unforeseen consequences, for example new HVAC equipment could cause a building to overheat in certain conditions, potentially contributing to the urban heat island effect. However, new technology and innovations will be required if climate change commitments are to be met, which is why it is important that there is collaboration across the industry to develop and trial new technology and share best practise, which is already evident in companies with robust Net Zero Carbon Pathways, such as Derwent ^[8]. Considering the challenge of reducing scope 3 emissions, such as during tenant fit out, since developers do not control this activity directly but are still responsible for the carbon, collaboration and stakeholder engagement will be of great importance.

Where does embodied carbon fit into the bigger picture, and how can it increase climate resilience?

Embodied carbon studies can help to increase climate resilience in a number of ways, for example, as such studies become more widespread, increased accountability for developers will help reduce redundant building and encourage developers to think critically about their projects, potentially leading to increased major refurbishment works in preference to new construction. Furthermore, embodied carbon studies can encourage leaner and lighter building, as the simplest way to reduce embodied carbon is to use fewer materials, through identifying and removing redundant building elements. Material hotspots with high carbon intensity can also be identified, and alternatives with lower embodied carbon, such as recycled and reused materials, are promoted which also helps to progress towards a circular economy as highlighted in the European Green Deal ^[9]. Moreover, by considering embodied carbon during the design phase, strategies can be put in place to reduce it, such as designing for deconstruction, allowing building elements to be disassembled and reused or recycled more easily at the end of life.

Best practice dictates that accounting for embodied carbon emissions falls both with the initial developer and first-time purchaser of buildings ^[10], because both can have an influence over the design and construction which takes place. Whilst later purchasers of that building will not assume liability for the embodied carbon, it does present an increasing transition risk to developers and purchasers of new buildings, because over time, embodied carbon will contribute an increased proportion of the overall building lifecycle carbon as operational emissions fall. As a financial value is assigned to this risk, the incentive to minimise embodied carbon in future will become ever more critical in investment decision making.

Fortunately, years of varying approaches to measuring and managing embodied carbon have now given way to increased industry consensus, through the publication of key guidance, such as the RICS Whole Life Carbon Assessment for the Built Environment ^[11]. Several tools now also exist to enable efficient construction of embodied carbon models and identification of best practice enhancements. EVORA utilise One Click LCA for this purpose, saving clients precious time and resource in fast moving design processes.

Embodied Carbon Studies should also be incorporated into a Net Zero Carbon Pathway, as this sends a clear market signal that the financial risks of climate change have been understood and accounted for, which in turn is likely to attract investors, improve stakeholder relations, and could even attract tenants and increase asset value as the market develops over time. However, it is important to plan out a pathway sooner rather than later, reducing the likelihood that a sudden transition is required, which in turn reduces the financial risk of climate change.

If you are interested in getting help on your Net Zero journey, you can contact our Climate Resilience team.

References

[1] Paris Agreement, United nations Framework Convention on Climate Change, 2015

https://unfccc.int/sites/default/files/english_paris_agreement.pdf

[2] World Green Building Council, 2020

https://www.worldgbc.org/advancing-net-zero/what-net-zero

[3] IPCC, Global Warming of 1.5⁰C, 2018

https://www.ipcc.ch/sr15/

[4] Better Building Partnership, Climate Change Commitment, 2019

https://www.betterbuildingspartnership.co.uk/property-owners-make-groundbreaking-climate-change-commitment

[5] European Commission, EU Emissions Trading System (EU ETS), 2020

https://ec.europa.eu/clima/policies/ets_en

[6] Mayor of London, New London Plan, 2020

https://www.london.gov.uk/what-we-do/planning/london-plan/new-london-plan

[7] TCFD, Recommendations of the Task Force on Climate-related Financial Disclosures, 2017

https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-2017-TCFD-Report-11052018.pdf

[8] Derwent, Net Zero Carbon Pathway, 2020

https://www.derwentlondon.com/uploads/downloads/Responsibility/Derwent-London-Net-Zero-Carbon-Pathway-July-2020.pdf

[9] European Commission, A European Green Deal, 2020

https://ec.europa.eu/info/strategy/priorities-2019-2024/european-green-deal_en

[10] UKGBC, Guide to Scope 3 Reporting in Commercial Real Estate, 2019

https://www.ukgbc.org/wp-content/uploads/2019/07/Scope-3-guide-for-commercial-real-estate.pdf

[11] RICS, Whole life carbon assessment for the built environment, 2017

https://www.rics.org/globalassets/rics-website/media/news/whole-life-carbon-assessment-for-the–built-environment-november-2017.pdf

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[12] Climate Action Tracker, 2020

Physical Climate Risk Assessment

August 7, 2020/in Sustainability /by Sonny Masero

EVORA’s Climate Resilience team has been advising clients on physical, transition and litigation risks associated with climate change – and how these affect the resilience of financial investments. To this end, the EVORA team has been evaluating which specialist data analysis partner to work with. The majority of data services available today are focused on analysing physical risks, like the extreme weather impacts of heat, flooding and storms. Over the last month it seems like a new data service has been launched each week and we’ve spoken to 10 suppliers so far.

The uptake of the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD) for managing Climate Risk in financial investments has been rapid, although recent surveys suggest that the real estate sector is lagging behind. For those companies which complete the annual GRESB survey, the introduction of a Climate Resilience module shows the increasing importance of this topic and it will be interesting to see if this become a mandatory inclusion in 2021.

In our recent conversations with real estate investors and investment managers, there are varying degrees of maturity around how to identify and manage climate risk. There is clear investor demand, from Europe, Asia and North America, that these risks should be disclosed and managed, but the investment managers are still defining methodologies and in most cases this is still a top-down approach. It is revealing to see that rating agencies, like Moody’s, MSCI and S&P, have all made investments or acquisitions in data on the physical risks of climate change.

Our approach to assessing the materiality of physical risks is in three broad phases:

A portfolio or fund screening of a range of weather hazards to prioritise a deeper investigation of the high-risk assets, which can now be quickly produced by a data service partner,
An assessment of the impact pathways to create a shared understanding of how the hazard risk could impact the drivers of asset value, and
A detailed investigation and assessment at asset-level of the specific, material hazards which impact value and are prioritised from 1 & 2 above.

Today, there is not an existing data partner which can deliver on all three of these phases end-to-end so we are working with partners who are ready to collaborate with EVORA to deliver the best service. The deeper analysis of understanding the value-at-risk is still emergent and fluid for investors, although there is a better understanding amongst real estate insurers based on damage costs and claims data. Our expectation is that this market for data analysis will develop significantly over the next 18 months.

Our evaluation so far has identified partners with varying levels of market-readiness, which we have grouped into the following:

SaaS-ready – those partners who can provide an online physical risk screening of assets and portfolios today with a standard price,
Specialists – bespoke or tailored analysis with a one-off price, and
Start-ups to watch – those who have interesting new offers, but are still being developed and priced before they move into one of the other two categories

To structure our evaluation of Physical Climate Risk Data Analysis Services we considered the following criteria:

Technical –the use of appropriate science-based methods to assess climate risk and an evidence base relevant to our clients’ assets with transparent sources. Ideally, the data would have some form of 3^rd-party assurance.
Geo-scale and resolution – the geographic scale and data resolution appropriate to the hazard category and the nature of the engagement. Visualization of risk must be clear.
Industry alignment – the partner should be able to demonstrate that their solution is consistent with industry standards, regulations, guidance and frameworks where appropriate – for instance TCFD recommendations and CDSB/GRESB requirements. The assessment must be relevant to the type of real asset, i.e. commercial office, residential, power network, road, etc.
Client relevance – the partner must be able to present their data/software in a way which is commercially relevant to our clients’ business and aids clear communication, ensuring that it aligns with our four engagement models.
Commercial & delivery model – the partner model must fit the way in which EVORA delivers consulting and SIERA services and provide value to our clients.

If you are interested in receiving advisory services from our Climate Resilience team to understand how to manage and disclose climate-related financial risk, we would be happy to share more of our observations.

EVORA can provide these services to get you started on your climate resilience journey:

Gap Analysis of Risk Readiness
Risk Materiality Portfolio Assessment
Net Zero & Climate Risk Asset Audit
Net Zero & Climate Risk Data Strategy
Training & Coaching

If you are interested in getting help from our Climate Resilience team, please contact us.

Sustainability Report Post-COVID-19

June 11, 2020/in News & Views, Sustainability /by Joanna Tomlinson

As COVID-19 coincided with our spring peak reporting season, our reporting clients have had to consider adjusting their reports to suit. Despite the focus on the 2019 reporting calendar, many have chosen to acknowledge COVID-19 within the introduction or even a dedicated full chapter, allowing stakeholders to considerately judge the effectiveness of the organisation’s response.

This crisis has also placed an emphasis on social criteria. We have observed more reports focusing on the treatment of employees, suppliers, and relationships with local communities. Changing stakeholder priorities means that organisations are increasing attentions on social issues to demonstrate responsiveness to the highest priorities at the present time.

We perceive next year’s reporting to be the most changed by the disruption has caused. Accordingly, EVORA is developing aspects of reporting, including:

Re-examining materiality assessments to ensure the true identification of sustainability issues that are important to both stakeholders and business continuity.
Presenting further disclosures, to provide effective insight into an organisations COVID-19 response.
Continuation of reporting on standard, year-on-year ESG data and performance, which will allow readers to evaluate the organisation’s resistance to shocks.
Backing data with contextual explanations. We perceive that there will be significant reductions in environmental performance data reported, such as energy and travel. This fall in carbon emissions will undoubtedly accelerate the attainment of sustainability goals. However, this distortion will require a full narrative with expectations for future trajectory.

Stakeholder scrutiny of how organisations are responding to the COVID-19 pandemic is bringing heightened attention to the importance of corporate transparency on sustainability issues. EVORA design reporting strategies for organisations, enabling them to apply frameworks, communicate meaningful sustainability outcomes and impacts to key stakeholders and use reporting as a tool to improve sustainability performance. Get in touch with the EVORA reporting team today.

EVORA become signatories to the Net Zero Carbon Buildings Commitment

June 5, 2020/in News & Views, Sustainability /by EVORA

We are delighted to announce that EVORA Global has joined nearly 100 other organisations in signing The World Green Building Council’s Commitment.

The World Green Building Council (WorldGBC) is a global network leading the transformation of the built environment to make it healthier and more sustainable. Their Net Zero Carbon Buildings Commitment calls for companies, cities, states and regions to reach Net Zero operating emissions in their portfolios by 2030, and to advocate for all buildings to be net zero in 2050.

The aim is to drastically reduce operating emissions from buildings, and in doing maximising the chances of limiting global warming to below 2 degrees.

Sixty-two of the 96 Commitment participants are businesses and organisations, and collectively our action alone will reduce more than 3.3 million tonnes of carbon emissions. Additionally, 28 cities and 6 states and regions have signed the Commitment, signalling a shift in political will towards net zero policy.

“Since launching EVORA in 2011, I’ve seen a monumental shift in opinion. Not just in the real estate industry, but the whole conversation of suitability, responsibility to the environment and climate change. We are excited to join and promote this important initiative. We shall continue to use our influence to challenge traditional approaches to demonstrate both the necessity and business case for ensuring climate and ESG related risks are systematically assessed throughout the investment process. ESG is here to stay and we intend to be at the forefront of tackling climate change and ensuring a sustainable future.”
Chris Bennett, EVORA Managing Director

The WorldGBC’s Commitment for zero carbon buildings places energy saving at its heart. This approach is completely aligned with EVORA’s commitment to reducing operating emissions from buildings and belief in building a more sustainable future.

BREEAM In-Use Version 6 Released – Headline Changes

May 28, 2020/in News & Views, Sustainability /by Joe Ellis

Earlier this month, BRE released the latest version of the BREEAM In-Use International Scheme, Version 6. The uptake of BREEAM In-Use assessments has increased significantly over recent years, so there is no doubt that the requirements of the new standard will have a wide-reaching impact.

With this in mind, let’s take a look at the headline changes below.

“Overall, the bar to achieve ratings has well and truly been raised, so it’s important these changes are fed into BREEAM In-Use Improvement Programmes as early as possible.”

Removal of Part 3

In the BIU 2015 scheme, Part 3 (Occupier Management) required considerable tenant engagement and was rarely assessed. BRE have therefore only included Part 1 (Asset Performance) and Part 2 (now called “Management Performance”) in the scheme.

New Categories

Resources category combines issues from the Materials and Waste categories of the BIU 2015 manual bringing together circular economy principles.

Resilience category considers an asset’s physical, social and climate change risks and has improved BIU 2015 elements on natural hazards, durability, security and climate related risk management.

Minimum Standards

Previously only in Part 3, minimum standards are now in place for Part 1 and Part 2. Note that for Part 2 a sustainable procurement plan (Rsc 05) and fire risk assessment (Rsl 09) is required to achieve any rating, a significant change.

Exemplary Credits

Introduction of exemplary credits can be achieved for performance levels beyond what is recognized by standard criteria and are each worth 1% (regardless of the category weighting) to the overall score (up to 10% boost capped at 100%).

Notable Changes to Weightings

% decreases were seen in Land Use and Ecology, Transport, Pollution, Management, Energy
% increases were seen in Health and Wellbeing, Water, Materials and Waste

Weightings are now as follows:

Integration of Key ESG Topics

Alignment with TCFD e.g. Rsl 06 Emergency plans and climate-related physical risks and Rsl 07 Climate-related transition risks and opportunities.

Social value focused e.g. Rsl 08 Social risks and opportunities considers the wider risks and opportunities for the asset. These include social disruption, public health (such as pandemics), poverty, and forced labour.

Greater context to UN SDGs provided across a number of categories e.g. Goal 3 (Good Health and Wellbeing) under ‘Health and Wellbeing’, Goal 6 (Clean Water and Sanitation) under ‘Water’, Goal 7 (Affordable and Clean Energy) under ‘Energy’, Goal 11 (Sustainable Cities and Communities) under ‘Transport’ and ‘Resilience’, Goal 12 (Responsible Consumption and Production) under ‘Resources’, Goal 15 (Life on Land) under ‘Land Use and Ecology’.

A route to Net Zero certification may be possible for assets that achieve 50/50 in the energy section. This section takes the operational CO2e intensity of an asset and compares it against the relevant ‘Reference Benchmark’ CO2eq emissions (established by BRE) using a sliding scale, with a maximum of 50 credits being awarded for a zero carbon building, and 0 credits awarded where the assessed emissions are more than four times the ‘Reference Benchmark’ emissions. An additional five exemplary credits are available for buildings that are carbon positive.

Greater Emphasis on Performance

Credits now awarded for the completion of energy audits (ENE 22) and reduction of carbon emissions over time (ENE 24).

More Flexibility in Achieving Credits

A note has been added to each of the evidence requirements in each issue to allow for a wider range of acceptable evidence types e.g. assessors’ own site inspection report, communication records, documented interviews.

Land Use and Ecology use was rarely a section when you could score high due to limitations with inner city assets, but it now allows the enhancement of ecological value offsite (within 2km e.g. local park).

Certification Process

There are no more renewals required each year in between the three year recertification period; each certificate will be issued with a three year expiry date. Note assessments on the old scheme will still need to be renewed.

The survey remains open post submission/certification and answers can be changed at any time in the middle of the three-year cycle without re-certification. This includes adding a new Part to certification which will not reset the three-year cycle.

Certification fees are only required if you make significant changes (≥10% change to score) or want to recertify with a new score. Mid-cycle submissions can be made up to 10% of the score via desk-based audit, anything more will be treated as an initial certification and will require a site visit. Note that mid-cycle submissions will not reset three-year expiry dates.

Transition Period

Up until 4^th May 2021, it is still possible to assess on the old 2015 scheme. Assets assessed on the 2015 scheme up to this date will then have three years to transition to the V6 scheme. There can therefore still be assets on the 2015 scheme up until May 2024, though the vast majority would have transitioned long before then.

Assets currently assessed under the 2015 scheme will be able to wait until recertification is due (after three years from initial certification) before needing to make the leap to V6. The earliest an asset would have to transition is May 2021 if initial certification was achieved in May 2018.

Eligibility Criteria

Stricter occupancy requirements for Part 2 – ≤20% of the GIA can be classified as ‘vacant’ over the reporting 12 month period.

More clarity for Part 1 – ≤20% of the GIA can be classified as ‘unfitted’ at the point of submission.

Relaxed eligibility criteria for multiple building single assessments – the removal of “Connected to and share common services” requirement has been replaced with “All buildings must be located on the same site”.

For assets residing in other National Scheme Operator (NSO) regions (e.g. Germany, Austria, Netherlands, Spain, Norway, Sweden), they will be updating their own schemes later this year, closely aligning to the V6 scheme.

Overall, the bar to achieve ratings has well and truly been raised, so it’s important these changes are fed into BREEAM In-Use Improvement Programmes as early as possible. There are of course many other minor changes that our BREEAM assessors and consultants are getting to grips with, but the feedback from the team so far has been very encouraging. We believe BRE have done a phenomenal job in driving positive change, and encapsulated many of the key ESG issues the real estate market faces today.

A 2050 target but no time to spare!

April 21, 2020/in Data, Sustainability /by EVORA

By Lucy Curtis and Peter Willcocks

We are now in a critical period requiring rapid and urgent action to retrofit our buildings in a bid to address climate change. The Paris Agreement set a global imperative ¹ to restrict global warming to 2⁰C or below. To achieve this ambition, global greenhouse gas emissions need to reduce rapidly today with developed economies ultimately becoming Net Zero by 2050. We cannot afford to bide our time and cut emissions later.

Several policy drivers are now facilitating a step change in emissions reduction not within the next 30 years, but within the next 10 years. For example, under the European Green Deal, the EU Commission has recently furthered its ambition to reduce emissions by 50% by 2030 from 2005 levels. Also, the Energy Efficiency Directive (EED) aims to improve energy efficiency by at least 32.5% by 2030 with the Energy Performance of Buildings Directive (EPBD) setting out regulations to increase the rate and depth of building retrofit programs. Countries are also formulating long-term national strategies to achieve ‘Net Zero carbon’ targets by 2050 including mobilizing significant investment in innovation and sustainable economic activity such as renewable energy and decarbonization of the energy system.

Those leading the way in commercial real estate have signed the BBP’s Climate Change Commitment and will be disclosing plans to achieve Net Zero carbon by 2050 by the end of this year. ² It is today’s actions that will determine whether intermediate and long-term targets are achieved, but it is crucial that immediate action is coupled with longer term planning in order to minimize costs.

Risks & Opportunities

In the transition to a low-carbon economy, investment manager’s fiduciary responsibility will increasingly include assessment of how climate-related ‘transition’ risks, such as the legislative risks described above, will impact asset values. Such considerations will need to be included in future investment strategies and decision making.

Buildings where energy and carbon performance is not improving in line with emission reduction targets may be exposed to “stranding” risks. These risks could include a reduced investor, market and tenant demand, and exposure to increasing energy costs and carbon pricing. As a result, these assets may require significant capital investment to meet stringent energy and carbon performance regulations.

The recommendations from the Taskforce for Climate Related Financial Disclosure (TCFD), that are currently progressing towards mandatory disclosure, will require investment managers to identify, assess and effectively manage these potentially material financial risks. But it’s not all about risks. TCFD will also require investment managers to identify opportunities as improving energy and carbon performance increasingly serves to enhance and preserve asset value and secure long-term income streams by minimizing associated costs.

To improve forward-looking decision making and aid financial planning, specific tools are becoming available such as the Carbon Risk Real Estate Monitor (CRREM) developed in partnership with institutional investors and industry bodies including GRESB. The CRREM tool provides country and property use emission intensity benchmarks that are aligned with global warming scenarios of 2⁰C or below. It projects current building emissions intensity, allowing for factors such as grid decarbonization, and assessment of low-carbon transition “stranding” risks where factors such as future carbon pricing can be analyzed under a number of scenarios.

Data, data, data

Transition risks will increasingly be associated with whole building energy consumption and emissions intensity. To begin to assess risks, set targets to reduce building emissions and plan for Net Zero, the full picture of the current whole building energy consumption is needed.

Existing assets will most likely include tenant-controlled areas, which pose challenges for data acquisition especially for those with difficult-to-reach tenants on FRI leases and long-term leases in core strategic assets. ³ In addition to leveraging green lease clauses, building good tenant relationships will be key to unlocking tenant data. The installation of AMRs and partnerships with data collection agencies, will both be crucial to circumvent the inherently inefficient process of collecting data manually from property managers.

The Future is Decided Now

With only two retrofit cycles left to 2050 ⁴, long-term initiatives must be carefully planned to ensure intermediate emission and energy reduction targets are met while aiming towards a Net Zero emissions future.

Conducting this forward-looking assessment to meet these targets, and assessing the transition risks and opportunities at an asset level, may require changes in the process by which investment managers currently plan renovations and M&E upgrades across the asset hold period. However, by identifying the worst performing assets and implementing programs of Net Zero audits across portfolios, investment managers can begin to identify and plan the required measures to meet this ambition. It is also important to ensure sufficient depth of retrofit as opportunities arise within the retrofit cycle. Initiatives such as long-term Building Retrofit Passports, as proposed under the EPBD, will also help advance this agenda and assist in the planning process.

The usual practice of like-for-like replacements may no longer be sufficient but by making significant investments in energy efficiency and taking maximum advantage of retrofit opportunities in the short and medium-term, these costs can be minimized.

2050 may seem like a long time away, but investment managers need to act now to implement sustainability programs with the associated risks assessments and financial planning to ensure portfolios and investment strategies remain resilient as we transition to a low-carbon economy.

This article was originally published on GRESB Insights

¹ The international community convened in 2016 to sign the Paris Agreement, committing to limit global warming to well below 2°C and pursuing efforts to limit it to 1.5°C.
² http://www.betterbuildingspartnership.co.uk/node/877

³ http://www.betterbuildingspartnership.co.uk/sites/default/files/media/attachment/bbp-low-carbon-retrofit-toolkit.pdf

⁴ https://www.jll.co.uk/en/newsroom/jll-commits-to-making-net-zero-carbon-mainstream

A sustainable Internet: What is the cost of our current use?

February 25, 2020/in Sustainability /by Alex Graham

When people hear about sustainability, typical thoughts circle around travel, consumerism, buildings, the physical world. Conceptually, the web and the devices that allow us access to it, appear clean in their usage, far removed from belching power plants and noxious fumes.

But the reality is that every search performed on Google, every Netflix show watched, every Spotify song listened to, triggers servers somewhere to process and output data and then more servers to transmit it, consequently consuming electricity and burning fossil fuels.

Global electricity consumption by the internet is considerable, accounting for 1% of all emissions from burning fossil fuels (aviation accounts for 2.4%) the irony isn’t lost that the man who gave this stat is the brother of the “inventor” of the Web.

The industry is taking steps to reduce CO2 emissions. New movements encourage designers to consider sustainability in the web site design phase. Internet behemoths such as Google, Facebook and Amazon have made promises to go net-zero. Some have found novel ways to consume less by submerging data centres or building data centres in cold environments (a lot of electricity is consumed by just cooling the servers)

But there are actions we can take as users that will also help reduce those emissions:

Drop the quality. Video streaming accounts for the biggest volumes of data sent over the internet. Watching something in HD makes everything super-realistic but consider the impact. Go for the SD version and you can still enjoy the content, but drastically reduce the data streamed.
Do you need to search? When you know the web address to go to, open your browser and type it in. Or save it as a bookmark. Entering a keyword into the browser’s address bar (such as “BBC”) will provoke a search. Each search consumes some electricity. Cumulatively, those searches have a massive impact.
Download rather than stream. Is something on heavy rotation on Spotify? Then download it. This will also save your data.
Unfortunately, emails harm the environment, accounting for a huge carbon footprint. Consider not sending that email. Could you just phone? If you need to send it, just take a moment to think does everyone cc’d need to read this?
Change to a more sustainable search. There is a greener alternative to Google. Ecosia.org plant trees from the money they make through you using their search and claim 100% renewable energy usage. And they appear to be true to their word.
Switch off. The ultimate sustainable method!

Of course, the Internet has brought huge benefits to a more sustainable world. Online meetings have reduced the need to travel. The consumption of the written word has moved more online, reducing the number of books and newspapers printed. But it’s just a conscious move for everyone to recognise that their Internet use still consumes fossil fuels. And as Berners-Lee says,

“When we take a small action to cut carbon, it’s a message to yourself that you care about the climate emergency.”

Addressing the social impacts of climate change: What if we unlocked the social value hidden in the UK’s industrial and logistics assets?

February 20, 2020/in Sustainability /by Emily Day

In the discourse on social value and the built environment, we most often hear about infrastructure, multi-residential developments, and office spaces. However, 15% of the UK’s real estate market value is held in logistics and industrial parks ^[1]. These sites support many business types, with e-commerce businesses now taking up a larger proportion of tenants than in previous years. In fact, the manufacturing, transport and storage industries support just less than 4.6 million jobs in the UK alone ^[2].

In 2018, the manufacturing, transport and storage industries generated an estimated 30% of the UKs carbon emissions. Carbon emissions are a direct driver of climate change. Climate change is a global process which, carries with it significant social impacts. This short article makes the point that we should be considering the social value potential of all asset classes, especially those with greater environmental impacts.

What are the social impacts of climate change?

Impacts such as rising temperatures and poor air quality have the ability to affect the physical and mental health of the population, as well as their wider quality of life. By 2020, sustainability-conscious landlords are already familiar with monitoring consumption data to reduce their emissions. This often translates to prioritising initiatives focussed on energy usage. Although these activities are vital to reducing the extent of the climate crisis, sustainability programmes should continue to address the existing environmental, but also social impacts of climate change. This can be done by undertaking social initiatives at the asset level.

Taking Action

Individual assets have the scope to improve the lives of their occupants, visitors and surrounding communities. To address the social impacts of climate change, social value initiatives should seek to improve the physical and mental health of these people, as well as their wider quality of life.

There are a number of practical ways to implement social value and social impact improvements at individual assets.

Tenant engagement can kickstart a productive, bottom-up approach to establishing specifically what these actions might be. For example, tenants may identify that due to rising temperatures or extreme weather events, their work environment is sub-optimal.
Valuable, quick-win opportunities include provision of facilities to increase public transport use or cycling/walking, encouraging use of the stairs for building users and making healthier food options ^[3].
Access to the natural environment both internally and externally can both improve the mental and physical health of tenants, as well as supporting climate adaptation through green infrastructure.
Due to the location of buildings within logistics and industrial parks, there are opportunities at the wider estate and public realm level, managed by landlords to provide social benefits to tenants.
In the longer term, employment and community initiatives can look to support education, work placement or employment opportunities for members of the community.

It is possible to quantify and report the positive impacts of the above. For example, certification schemes BREEAM and FITWEL have resources to assess and certify health and wellbeing aspects of buildings in multiple asset classes ^[4]. Whilst BREEAM encompasses most asset classes, FITWEL currently covers office, multi-residential and retail buildings.

Assessing the social value outcomes for occupants and visitors to buildings can also be done through quantitative social value metrics. EVORA has used HACT in past projects to assess outcomes of community engagement programmes.

To let us know your thoughts, please don’t hesitate to get in touch.

[1] Statista. (2020). Commercial property investment value UK 2017 | Statista. [online] Available at: https://www.statista.com/statistics/747082/commercial-property-investment-value-in-the-united-kingdom/ [Accessed 12 Feb. 2020].

[2] Ons.gov.uk. (2020). EMP13: Employment by industry – Office for National Statistics. [online] Available at: https://www.ons.gov.uk/employmentandlabourmarket/peopleinwork/employmentandemployeetypes/datasets/employmentbyindustryemp13 [Accessed 12 Feb. 2020].

[3] Fitwel.org. (2020). Fitwel. [online] Available at: https://www.fitwel.org/ [Accessed 12 Feb. 2020].

[4] BREEAM. (2020). BREEAM In-Use – BREEAM. Available at: https://www.breeam.com/discover/technical-standards/breeam-in-use/ [Accessed 12 Feb. 2020]

SDGs: Answering the Big Questions for the Real Estate Industry – What, Where, Why and How?

February 10, 2020/in Sustainability /by Claudia D'Almo

With a new decade upon us, there is now a call more than ever to address the proliferating global challenges facing our planet.

Governments can no longer fight this battle alone and need individuals and businesses to take action and deliver an agenda that provides a sustainable path for both the planet and society.

Clearly, this is no easy task – so how can real estate connect with and relate to global challenges? What is the motivation behind the bigger picture? And how can real estate owners, operators and occupiers oversee their potential impact in the long term?

Let’s begin to unpick the ‘Big Questions’….

‘What’

In 2015, the 2030 Agenda for Sustainable Development was put forward with world leaders setting out 17 goals with 169 targets aimed “to end poverty, fight inequality and tackle climate change”. The breadth of the Sustainable Development Goals (SDGs) aims to provide sustainable development for all persons and aspects of businesses and look for them to fully immerse into a new way of thinking that will positively impact the people and planet.

**Figure 1:** SDG goals (UN Framework: 2015)

‘Why’

Given that the real estate industry accounts for half of global wealth, 40 percent of the world’s consumption of primary energy and a third of all anthropogenic CO2 emissions there is no mistaking that the industry can contribute to achieving certain Global Goals… As the real estate industry is chiefly responsible for the development and management of assets and is also vulnerable to the impact of climate change, it goes without saying that the industry should be one of the main leaders fighting the cause of environmental stewardship.

So, why is it that the sector has barely scratched the surface of the SDGs since their deployment in 2015?

An agenda centred on 17 SDGs does run the risk of simply being too broad, complex or immaterial for businesses to address. In fact, a study conducted by PwC found that only one percent of companies stated they would assess their impact across all 17 goals. But are targets on No Poverty or Zero Hunger achievable or even relevant to the wider real estate industry?

Our own research conducted among 25 real estate companies achieving at least one five-star GRESB rated fund identified commitment to 13 of the 17 SDGs to some extent. Carbon and energy covering SDG13 (Climate Action – 70% adoption) and SDG7 (Affordable and Clean Energy – 52% adoption) proved the most common for actions relating to the operation of real estate assets. SDG5 (Gender Equality – 52% adoption) proved the most popular actions that are internal to each organization. Fewer than half of the sample group aligned with any other SDGs despite the notable impact real estate can have on SDG3 (Good Health and Wellbeing) and SDG 11 (Sustainable Cities and Communities).

**Figure 2**: Proportion of the sample committing to selected SDGs (real estate)

‘Where’

With global frameworks, it’s all about scalability – with 169 sub-targets to consider, it is difficult to pin-point what impact your business could specifically make. However, many activities and initiatives within your business may well align to SDGs already – whether this be indirectly or directly. The key here is to break down the goals into more manageable and understandable objectives that relate specifically to how you as a business operate.

First, ask yourself…

What is material and what are the relevant impact categories you want to address?

Reflect on your activities and the risks to people and the environment, as well as on beneficial products, services and investments. While doing so, consider both operations and the broader value chain. One way to make this simple is the use of a materiality assessment. In short, a materiality assessment is an exercise in stakeholder engagement designed to gather insight on the relative importance, and impact, of specific environmental, social and governance (ESG) issues. The key to getting real value from a materiality assessment is starting with a clear understanding of what information you are looking for, choosing the right stakeholders and applying the appropriate methodology to present the information effectively and make informed decisions.

Breaking down analysis into environmental, economic and societal factors allows you to understand the impact your activities have, and the programmes needed to mitigate adverse risks or exploit beneficial opportunities. Consider not only your objectives but your audience and who is involved. What topics are of most importance to your stakeholders? Who needs to take responsibility?

By this point, you will have developed a sense of what impacts you as a real estate business could have and their overall importance. Now, you must define objectives that could contribute to your SDG priority targets, including identifying the indicators used to measure progress against then.

Now for the ‘How’

Outcomes of a materiality assessment should be channelled into a structured framework, such as an environmental management system (EMS), to ensure programs are managed through a coordinated strategy. Building the SDGs into the strategy is a way to stop isolated work or seeing the global goals as somewhat as an additional task.

The strategy should define what metrics and indicators can be used to set appropriate targets, defining the outcome from each impact areas. It is important to consider how progress will be tracked and communicated. High-quality data is essential for making informed decisions and prioritizing action. Take, for instance, SDG13 Climate Action – here you may wish to monitor and report on energy usage and carbon dioxide emissions. The use of dashboards to easily convey current performance (at asset and portfolio level), track against historical periods, and importantly, communicate progress to stakeholders is a vital step in achieving climate goals.

**Figure 3:** Energy and Carbon Dashboards (SIERA)

Final Thoughts

An EMS provides a framework to increase focus within your business’ strategic planning process and understand the context and scope of impacts. Essentially, it answers the bigger question of ‘Where’ you can make an impact as a business. The key here is to be straightforward! No matter how big or small the change, it is important that you know your objectives and communicate them in a way that is both easy to understand and relevant to who you are targeting.

The SDGs can be perceived as global goals that are difficult to relate to the industry, let alone a business itself. However, they can act as a powerful tool in shifting the conversation to the bigger picture. Given the degree of involvement the real estate industry plays in these global challenges today, there is no denying that you as a business can play a significant role in contributing to these goals. However big or small, the time to act is now.