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Software as the foundation for investment grade data (IGD)

ESG is here to stay. Momentum is gaining to improve data quality and consistency. Regulations such as Sustainable Finance Disclosure Regulation (SFDR) are clearly helping to drive this. The perceived distinction between financial and non-financial data is not helpful one when ESG data, which might conventionally be seen as non-financial, is used all the time to inform investment decisions.

Clearly those who are managing data for ESG strategy implementation and reporting rightly need to focus on aspects, which London Stock Exchange highlighted, such as:

  • Reporting boundaries: ensuring data aligns to the fiscal timeframes and financial structure
  • Comparability and consistency: employing best practice in terms of methodologies
  • Provision of data: qualitative and quantitative for vital context and narrative.
  • External assurance: adding credibility to ESG reporting by following the principles of an independent auditing of the process.
  • Accuracy: establishing robust systems to bolster the collection and quality of ESG data.

Historically there’s been underinvestment in the systems and processes in the real estate sector to address data accuracy and quality. This can be said in relation to the adoption of technology but also from a resources and experience perspective. The requirements and expectations of ESG reporting in real estate has evolved rapidly and perhaps faster than the pace many companies are going at to address these gaps. Key to success in this is engaging those involved in the foundations of ESG data and with the tools like SIERA and SIERA+.

Take for example Net Zero Carbon (NZC) as a relevant ESG theme. Many real estate companies have made public commitments to reaching NZC by 2050. NZC is now firmly on the radar of Asset and Investment managers who are getting their heads around a new lexicon and learning how they begin to develop asset business plans and investment strategies that mitigate these transition risks.

A necessary first step is to get a baseline of performance to understand the current energy and carbon intensity of assets and funds/portfolios and what the impact of current action plans will be on NZC pathways.

To achieve this companies must get the fundamentals right in terms of having visibility of and centralising information to answer some key questions: where are the gaps in data coverage?, which are the best and worst performers in the portfolio?, What’s the current status of asset action plans?, Where in the portfolio should action be prioritised for improvement on each of these?

Example Portfolio dashboard, SIERA+

Undoubtedly technology plays an essential role here as a tool to drive efficiency and consistency in the data collection process and to centralise that data. However, ultimately this comes down to providing an easy and simple means of engagement and collaboration between Asset & Investment management and Property Managers.

We have developed SIERA+ to better equip property managers in engaging with ESG and addressed the priority needs; provide a simple view on performance against targets, ability to manage data quality and keep on top of actions. Notifications prompt when action is required and it’s generally set up to let users focus on the most material issues.

Example Action Plan dashboard, SIERA+

We also recognise that the culture of Property Managers can vary across diverse portfolios and English is not always the first language. Since this is about improving engagement we have made SIERA+ available in 5 languages.

Get in touch to know more.

ESG Data is Growing Up

We are entering a new era of ESG data. Historic market failures regarding our negative environmental and social impacts, and the resulting climate change, nature loss and social inequality, are starting to be corrected with structural changes to the market.

In the financial sector, we are seeing both dynamic and double materiality becoming an integral part of decision making. The WEF introduced the concept of dynamic materiality in 2020, where an ESG topic which is financial immaterial today can become material tomorrow. That is coupled with double materiality, which considers both the inside-out view of ESG, that is what impact does an asset have on the environment and society, as well as the outside-in view of what impact environmental, social and governance issues have on the asset.

Climate change and carbon pricing is a good example. In terms of dynamic materiality, an increasing number of companies are adopting an evolutionary internal carbon price to drive low carbon investment in real assets and to mitigate the risks of cost increases as climate change externalities are corrected in the economy – this price will increase over time making financial materiality more likely across all sectors. There is an obvious point of connection here with double materiality, which is that real assets create emissions and will inevitably face more regulations over time – see the PRI Inevitable Policy Response Forecast Report. As our climate changes we will see an increase in severity and/or frequency of extreme weather events which can damage and disrupt real assets. All of these aspects of potential materiality have to be considered in financial appraisals and investment-grade ESG data can provide insight on trends and relative performance of assets.

Investment and Asset Managers are using ESG data from assets to make investment decisions: choosing the right assets to acquire and dispose of; deciding how to finance improvements to those assets; and investment & credit risk management processes are now incorporating ESG data. 

Those processes and decisions are becoming more transparent to the providers of capital, so the quality of ESG data has to become investment grade.

The expectations from investors, and their asset managers, of ESG data is closing the gap with the financial and commercial data captured in asset management software, but the budgets invested in ESG data management software and processes is vastly different. ESG data is now more valuable than it has ever been before and financial regulations are going to increase that value. 

The EU Action Plan for Sustainable Finance, and similar changes to UK financial regulations, means that the duties of asset managers & lenders and the decision they take about ESG risks and opportunities are no longer optional.

Without investment-grade data about ESG performance and sustainability actions then it is not possible to understand the full impact on asset value. ESG risk, in particular climate risk, is a financial risk and this data should be incorporated into every financial decision. 

That wasn’t the case last year, so this change is happening quickly. 

ESG data was being used in-house to monitor performance, as it has been for the last decade or so. It was used for annual reporting and for voluntary disclosure. There was a small minority of investors asking about ESG at the start of 2020, but throughout the pandemic this has changed quickly. Last year, there was not a fiduciary duty to be discharged based on ESG data. Nor staff incentive programmes based on ESG measurements. That has all changed as the market has grown up to take a more sophisticated view of how our economy relies on natural and social capital, not just financial and manufactured capital. The materiality of ESG has been recognised across the financial sector.

The financial markets are undergoing a structural change. Sustainable finance, and particularly climate-related finance, is now a global priority. This has led to changing investor requirements and regulatory changes for banks, institutions and fund managers, such as SFDR, MiFID ii and mandatory TCFD reporting are all combining to bring about structural change. We now have to consider dynamic and double materiality and make financial decisions accordingly.

It is slowly, but surely cascading down to real assets: real estate, infrastructure and land.

For those experts in sustainable real estate and infrastructure, it is clear that assets are likely to be mispriced and that the transparency provided by these regulatory requirements for ESG data will make that clear. Without ESG data on performance and actions, it is not possible to assess the cost of transition. For real assets, there is not a trading solution to disperse all of these liabilities by disposing of them to others. There is a need to retain, rethink, invest and dispose based on early knowledge of ESG risks. The later this happens the most likely it is that asset owners will see value erosion through reduced income, defaults, decreasing exit values and cap rate compression.

ESG transparency will also influence tenants and the users of real assets. There is a reputational risk of not taking sustainability performance seriously enough. Now that people have more choice about where they work and live, this risk could be more material to income and asset value than ever before.

At EVORA Global, with our SIERA and SIERA+ software, we are making these risks more visible and manageable. This is enabling our clients to make proactive decisions about their assets and funds, and to effectively engage with investors and other stakeholders.

It is time to approach ESG data in a new way. The historic policies, processes and procedures may no longer be fit for purpose. Most of them are only backwards-looking and there is now mandatory requirements to be forward-looking, which has its risks and uncertainties. In choosing an ESG data management platform ensure that it is future-proof, aware of this rapidly changing financial landscape.


If you would like to get in touch with the EVORA team, you can do so by filling in our form or by emailing contactus@evoraglobal.com

Forward-looking ESG data

To integrate climate risk and sustainability into financial decisions, we need to standardise metrics, improve data quality and ensure that it is forward-looking as well as measuring past performance. For climate risk, this is an essential part of the TCFD Recommendations for integrating climate risk as an investment risk.

Climate risk is divided into three categories:

  1. Transition risk
  2. Physical risk
  3. Litigation risk

They all have forward-looking components. In ESG data terms, we can use historic data and data models to project future implications. We can do this more easily for the E in ESG because we know that we’re operating within planetary boundaries so we know there are limits. The Stockholm Resilience Centre (2015) monitors the nine planetary boundaries shown below.

Whilst this illustration doesn’t show us overshooting the climate change planetary boundary, that is because we haven’t yet. We are on track to do so with our present rate of greenhouse gas (GHG or carbon) emissions. That is why, in 2015, the UN Paris Agreement was signed by 195 states. This Agreement set us on a course to reduce emissions to Net Zero Carbon (NZC) by 2050, which keeps global warming well below 2°C, and ideally 1.5°C, to prevent catastrophic, non-linear climate change.

Over the last two years, many real estate companies and investors have committed to a Net Zero Carbon target and some have a pathway to get there. For most fund managers, they have not yet had time to project out a NZC pathway for their fund and real assets.

A science-based NZC pathway can show a clear route to reducing emissions each year. We need to be over halfway to NZC by 2030. However, local markets will move at different speeds depending on their starting point today; the local regulations; the cost of energy and carbon emissions; and, to some degree, the local awareness of a changed climate and how this forces climate adaptation. Climate adaptation will be required to protect against extreme weather events, which have become fiercer and/or more common over the past decade increasing insurance losses and premia.

These climate risks are the reason why ESG data needs to be forward-looking.

At EVORA Global, we have developed our SIERA software to be forward-looking on climate risk. We have worked on two new modules. The first is focused on NZC and transition risks and this is already available. The second builds on our partnership with Moody’s 427 physical climate risk assessment, which is used by our consultancy team. This will enable users to see both sets of climate risk in one place, associated with each asset and fund.

The screengrab below shows the NZC module, shows a real estate portfolio and the fund’s NZC pathway. This uses asset energy data from the last 9-12 months to calculate carbon emissions for the whole building. Based on asset type and location, it then automatically projects a science-based NZC pathway out to show the required emissions reduction. The tool can then be used to run different scenarios for emissions reduction based on what is know about each asset.

There are other features within the NZC module so do get in touch if you’d like to organise a demo