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EVORA Insights New York Roundtable

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In September, together with Tishman Speyer, we co-hosted a Roundtable lunch and discussion at the Rainbow Room in the Rockefeller Center. The food and the view were fantastic! It was an invite-only affair for eight real estate investors and investment managers. The topic of conversation was climate risk and how it can effectively be integrated into investment decision making; looking at the differences between the European and the American markets.

“Looking at Europe is like a glimpse of the future – what is happening there now will come to the USA in 5 years or less.”

For any US investment manager raising capital from Europe, they are being faced with ESG questions from investors and sustainable finance regulators. There is an expectation in the US that ESG is here to stay. The US market is having to learn fast, but there is a big gap between the leaders and the laggards. Some ESG themes are seeing greater adoption than others, like Net Zero Carbon and transition risk. This is flowing down from corporate and fund strategies into individual asset plans. It has placed an unprecedented demand on the relevant technical expertise. Diversity, Equity & Inclusion (DEI) has been a priority for the US for a long time and has required a more sophisticated and integrated response than it in Europe.

“We’d never not do a deal because of climate risk.”

There is still a gap between acting on ESG and an acceptance that it will materially affect transactions. However, there is anecdotal evidence that US deals have been stopped and prices have been chipped as a result of European investor concerns about climate risks. One European Core+ fund factored in the transition capex over 20 years and used that to reduce the price paid. Another pulled out of deal during the final stages of DD because the power grid feeding the property was not decarbonising at a fast enough rate.

No-one is monitoring this impact on the real estate market in a systematic way so there is a lot of speculation about which local markets will be affected. Some high risk markets, like flood-prone Miami, do not seem to be seeing demand or prices decline, although there is some evidence that transactions are taking longer. In other US seafront locations, there are other indicators that a future price correction or increased illiquidity might occur, such as increased mortgage and loan default rates.

“Two hold periods: nine years is today.”

Investment managers are thinking ahead in terms of what a Core fund might be looking for when acquiring an asset from a Added Value fund: Will they tolerate increasing climate risk, such as high operational energy costs and carbon emissions due to poor building fabric and inefficient equipment? If more climate change has occurred, will flood, fires and storms become more frequent or more extreme?

That perspective of two hold periods and different attitudes to risk can bring future climate risk considerations back to the present day. Getting the right information from risk models has proved difficult, with multiple vendors providing different answers for the same assets and locations.

“If you’re serious about ESG, it shouldn’t be in an appendix in the IC memo, it should be upfront.”

ESG and climate risk is being integrated into DD and into IC memos. This is occurring in different ways, both quantitative and qualitative. With some firms factoring climate risk into financial models by adjusting the cap rate, as a proxy for increased risk, or adjusting the cash flow to factor in increased transition costs. There is no standard approach, making it difficult to price climate risk into real estate transactions. However, if exit prices are getting chipped then more leverage is required on the buy-side if the required risk-adjusted returns are to be achieved.

Not all of the guests saw climate change as a risk, they also saw accretive opportunities for some assets. If you know what needs to be achieved, then risk-adjusting your under-writing can be more impactful. Instead of a divestment strategy.

“We’re not worried about how much insurance will cost, but whether there will be insurance.”

One developer-operator was concerned about the direction that the insurance industry is taking. In some locations, policies are not being written, even when the location has a high economic resilience and the wealth to adapt to some change. The problem was seen as the insurance sector being backwards looking using historic models. Others felt that these policies couldn’t be packaged for re-insurance. There was a desire for more nuance, particularly for unique assets like data centers.

“The question of whether there should be a carbon price has been overtaken by energy prices.”

Opinions were split on the value of having a carbon price, which could be introduced through fines, like in NY Local Law 97 or through carbon taxes like the new one in Demark. An internal carbon price could also be adopted. There was a view that the Ukraine war, and historic underinvestment in energy security through renewable energy and energy efficiency, has precipitated a very high energy prices which is already driving different decisions without needing a carbon price. Making it easier to justify investment in assets to decarbonise portfolios. Some owners have wanted to help tenants who are struggling to pay by aggregating their demand and using collectively buying power, but the aggregation has proved too hard.

“An empty building is an unsustainable building, so who’s measuring whether climate risk is making a building empty?”

Looking back to the UK, properties are laying empty as businesses have to close down because they can’t afford their energy bill. It is going to cost the UK government about £170bn this year to help those who can’t pay. This is a transition risk because it has been partly caused by conditions created historic underinvested in building energy efficiency and renewables, with the invasion of Ukraine tipping the balance. For real estate investors, these voids compounds the challenge of re-upping leases following the pandemic and sustained hybrid working.

In the US, better data does exist on energy consumption, in some locations where there are legal requirements to disclose annually through Energy Star. This makes it possible to benchmark properties and understand relatively efficiencies. It can show which ones are more exposed, requiring greater capex, and whether it could effect rental income and yield.

If you would like to find out more about EVORA Insights, please contact us today.

A brief history of materiality and ESG at the SEC

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It is interesting reading the comments [1] to the proposed ruling by the US Securities and Exchange Commission (SEC) on The Enhancement and Standardization of Climate-Related Disclosures for Investors [2]. Points raised are diverse, but broadly fall within one of two camps; those vehemently opposed to the ruling, and those in support (often calling for more ambitious requirements over and above the proposal from the SEC). This binary grouping is neither surprising nor unexpected for the SEC, given the organization’s four-decade history of contests concerning environmental proposals. [3]

And now in 2022, the SEC is proposing extensive new disclosure requirements for publicly listed firms starting in the fiscal year 2023 (for filing in 2024) for the largest filers – those with a public float greater than $700m – with phased introduction for firms with smaller public floats.  The first compliance date will impact around 2,000 businesses and eventually impact approximately 7,000 in total. The requirements require registrants to include certain climate-related information in registration statements and periodic reports, such as on Form 10-K, including:

  • Climate-related risks and their actual or likely material impacts on the registrant’s business, strategy, and outlook
  • Climate-related risks and relevant risk management processes
  • Greenhouse gas (“GHG”) emissions
  • Climate-related financial statement metrics
  • Climate-related targets and goals, and transition plan, if any.

The disclosure requirements are centered around the recommendations from the Taskforce on Climate Related Disclosures (TCFD). The SEC joins eight jurisdictions that have TCFD-aligned official reporting requirements, (Brazil, European Union, Hong Kong, Japan, New Zealand, Singapore, Switzerland, and the United Kingdom). Additionally, the International Financial Reporting Standards (IFRS) Foundation announced a new International Sustainability Standards Board (ISSB) to develop a comprehensive global baseline of high-quality sustainability disclosure standards to meet investors’ information needs.

What is TCFD?

As a high-level summary, the TCFD recommendations provide a framework for businesses to identify, evaluate, manage and monitor climate related risks and opportunities. They are centered around four themes, with a total of 11 recommended disclosures.

  • Governance – what role do people play in managing and overseeing climate related issues?
  • Strategy – how will organizations change to manage future climate-risk?
  • Risk Management – what processes are in place to identify, manage and assess risk?
  • Metrics and Targets – how do you measure progress against climate-related goals?

Globally, there are over 3,400 TCFD supporters, although not all of these have disclosed in full yet. The TCFD 2021 Status Report [4] provides a breakdown of public reporting against each of the recommended disclosures; the Materials and Buildings sector captures commercial real estate, although the 404 firms reporting will not be exclusive to the buildings sector. 

The results suggest that:

  • Most firms are disclosing qualitative risks and opportunities – per Recommendation: Strategy a)
  • Materials and Buildings have highest level of Metrics and Targets disclosure
  • Scenario analysis is disclosed by only a small percentage of firms  – per Recommendation Strategy c)
  • Governance, including Board and Management oversight of climate risks and opportunities, is the next least well disclosed theme after scenario analysis – per Recommendation: Governance a) and b)

On the latter point, gaining Board buy-in and a commitment to climate-related topics is essential for strategies and risk management processes to be truly integrated. Without this, firms will be disclosing under the TCFD framework for compliance reasons only – a missed opportunity.

Disclosure rates against the 11 recommendations differ by region, with Europe leading over the period from 2018 to 2020.  Double digit increases over two years were seen across all regions, with the exception of North America, which also has the fewest percentage of firms disclosing against the 11 recommendations. The takeaway from these numbers is that the SEC is leap-frogging the comfort zone for many North American firms.

GHG data and data quality

The proposed SEC ruling requires registrant’s direct GHG emissions (Scope 1) and indirect GHG emissions from purchased electricity and other forms of energy (Scope 2) to be disclosed in absolute terms (by Scope) and as an intensity metric. Scope 3 emissions – of which there are 15 categories covering indirect upstream (i.e. related to goods or serviced purchased) and downstream (i.e. related to goods or service sold) – are, receiving a lot of attention due to the fact that Scope 3 emissions are out of direct control of landlords and data quality and coverage is often poor. Aside from small reporting companies, Scope 3 needs to be reported from FY 2024 (filing in 2025), if material.

Defining materiality is not an exact science and the lack of guidance from the SEC may result in reporting opt-outs where Boards deem the organization’s emissions to be immaterial to investor decision making. However, the quantity of emissions (tons CO2) is one method of determining materiality; the Science Based Targets Initiative (SBTi) sets a threshold for materiality as 40% of Scope 3 in relation to Scopes 1 and 2. Other factors influencing materiality need to be considered, such as:

  • Risk – considering relevant climate-related legislative and reputational risks
  • Influence – the registrant’s influence over emissions generation and reductions e.g. percentage ownership and / or a board representation within investee companies
  • Financial – emissions associated with a high level of spend or those generating a high level of revenue.

Many of these factors will need to be considered on a case by case basis, particularly legislative risks, which will need to be considered country by country and at the city level in many instances. For large-accelerated and accelerated registrants there are additional requirements, which will have ramifications for the entire real estate industry, for limited assurance (phased introduction from 2024 for filings in 2025) and the more stringent reasonable assurance (phased introduction from 2026 for filings in 2027).  While public REITs [5] are clearly in the SEC’s crosshairs, so too are others in the real estate value chain. For example, lenders (of both debt and equity investments) will need to report their share of Scope 3 financed emissions – most likely following PCAF [6] guidance.  Similarly, corporate tenants will want to understand their upstream GHG impacts where energy is provided as part of a service e.g. where a landlord procures energy in a building and recharges costs to tenants. The proposed rules will surely impact both contractual lending and leasing agreements on data provision and, importantly, the underlying quality of that data.

Transition plans

Scope 3 emissions also need to be disclosed in a filing if a registrant has made a transition plan (decarbonization target) public that includes Scope 3. For real estate, it is common to see leaders in ESG set net zero carbon targets that include Scope 3, but this is often ringfenced as tenant energy use. As the table below indicates, there are other Scope 3 emissions that may be materially relevant beyond tenant energy use, including embodied carbon of new construction and refurbishments. How the industry responds to this requirement will be interesting to watch. REITs that understand their full Scope 3 position will be able to retain existing climate goals. Those who do not will need to get to grips with Scope 3 accounting, or be forced to take down public goals, or walk back their scope accordingly – neither action is likely to be viewed as favorable to investors that see climate risk as an investment risk.  

Source: Adapted from UKGBC: Guide to Scope 3 Reporting in Commercial Real Estate [7]

A transition plan is used to lay out actions and targets that demonstrate an entity’s pathway toward a low-carbon economy, through reducing its absolute and / or intensity-based GHG emissions or concerning exposure. There are many frameworks that set out characteristics of an effective transition plan. This includes broad industry frameworks such as UN Asset Owners Alliance, through to more sector specific guidance used by signatories of the Net Zero Asset Managers Initiative issued by the IIGCC, and more besides. 

Unlike the frameworks named above, the SEC proposed rule does not provide sufficient guidance on the characteristics of an effective transition plan. For example, this may include disclosure of:

  • Base year, target end year and importantly, interim target year(s)
  • Climate scenario considered (e.g. 1.5C, 2C, 3C)
  • Type of target (e.g. absolute or intensity based)
  • Coverage and scope of the target, including narrative on any carve-outs
  • Alignment with recognized and suitable frameworks

Without specific disclosure requirements, there is a risk that transition plans may not be comparable nor decision-useful for investors – a concern raised by many commentators.

Lastly, but certainly not least, a new Article 14 to Regulation S-X would require a registrant to disclose climate-related financial metrics relating to severe weather events and other natural conditions and / or transition activities.

These financial metrics must be presented on an aggregated line-by-line basis for all negative impacts, and separately, all positive impacts where the impact is greater than 1% of the line item. If collecting Scope 3 data appears challenging, collating these financial metrics will present a gargantuan task for many registrants. Once the data is held, registrants will then face the effort of contextualizing the metrics so they don’t unduly scare investors.

Final thoughts

Overall, the SEC has moved from zero to one hundred in some incredibly far reaching, and challenging, requirements. The proposed rules lack clarity in a number of areas and will surely be revised before final issue. However, I do expect the rules to be materially similar when the final form is issued, with my prediction being year end.

Once introduced, the challenge for registrants is to view the rules “beyond compliance” and embrace the TCFD framework as a pragmatic methodology for climate change preparedness and resiliency. This mindset is essential if the US (and the world) are to achieve a just and orderly transition to a net zero economy. 

[1] https://www.sec.gov/comments/s7-10-22/s71022.htm

[2] https://www.sec.gov/rules/proposed/2022/33-11042.pdf

[3] The Commission first addressed disclosure of material costs and other effects on business resulting from compliance with environmental law in a 1971 Interpretive Release.

  • The 1971 position took two years to codify and reached the final and current form in 1982, after a decade of evaluation.
  • In 1975, the Commission also concluded that it would require disclosure relating to social and environmental performance “when the information in question is material to inform investment”.
  • In 2010 SEC guidance specifically emphasized that climate change disclosure might, depending on the circumstances, be required in a company’s Description of Business, Risk Factors, Legal Proceedings, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”).
  • In 2016, the SEC issued a Concept Release regarding the modernization of regulation S-K including on climate change, noting the growing interest in ESG disclosure among investors and also the often inconsistent and incomplete discourse due to the voluntary nature of corporate sustainability reporting.
  • Finally in 2021, input was sought by the SEC on whether current disclosures adequately inform investors. This was made at the same time the federal Financial Stability Oversight Council (FSOC) listed climate change as an emerging threat to the financial stability of the US.

[4] https://assets.bbhub.io/company/sites/60/2021/07/2021-TCFD-Status_Report.pdf

[5] https://www.reit.com/what-reit#:~:text=REITs%2C%20or%20real%20estate%20investment,number%20of%20benefits%20to%20investors

[6] https://carbonaccountingfinancials.com/

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

Does gardening improve our wellbeing? Indeed it does!

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We’ve long known that nature is good for us. Aside from the now-clear evidence of the way in which nature maintains the equilibrium of our planet, for us as individuals being in green spaces outdoors enhances physical wellbeing, and – it turns out – mental wellbeing.

The benefits of gardening, or simply being in the garden, include, according to a Kings Fund report, improved social skills, as well as reduced susceptibility to anxiety and depression. This positive impact on mental and other health has been extensively studied. One example comes from Exeter Medical school, where they took a sample of 1,000 urban dwellers and tracked their health over an 18-year period. The findings revealed that those with green space near them had fewer, or reduced,  incidences of mental distress.

Let’s unpack this. For a start being in gardens or nature is likely to bring with it some form of physical movement. Even if we’re not talking about vigorous exercise, it’s likely that being outdoors will involve moving and walking around, and may well be bending or stretching as we get our hands into the soil and tend the greenery. A Harvard study found that 30 minutes of gardening among other household tasks is akin to 30 mins of yoga or badminton!

Then there is the fresh air. Although our air quality may leave something to be desired in the great outdoors of our cities, it is at least fresher than the air that circulates in our homes when we’re stuck indoors, and a lungful of fresh air can go a long way in giving us some pep.

Our gardens and open spaces are also, if nothing else, enlivening to the senses as our eyes feast on the colours, our noses on the scents, our minds on the shapes of trees and flowers and our ears on the… well often just the silence! All of which give us a welcome reprieve from the whirring of computers, traffic, air conditioning and our own brains.

Talking of which (brains), it seems that our brains and nervous systems are able to rest and recharge through nature (and we all need more of that). The Science Team at the Royal Horticultural Society has spent the last five years collating current scientific evidence on gardening and health, and undertaking new scientific research into how our sensory responses and emotions are impacted by gardens and plants. So it is only a matter of time before we understand more behind the science of why and how our nervous systems are positively impacted by nature.

What we have found out so far is that the soil itself is actually good for us. Numerous studies (here’s one) by neuroscientists over the past couple of decades have traced the impact of friendly bacteria in soil on our nervous system and found that the friendly bacteria in soil activates our brain cells to produce serotonin. In other words, it has a similar impact on the brain as anti-depressants. 

So whilst we have all spent the past 2 years furiously washing our hands, it may now be time to get them into the dirt of the soil and boost those good chemicals in our brain.

To celebrate the National Gardening Week (27th April – 5th May), EVORA’s Health & Wellness team is having a Plant Power Month with various activities for Evorians to get their hands dirty!

EVORA Global strengthens its global presence with new operations in Singapore

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EVORA Global is delighted to announce their collaboration with Paia Consulting, a specialist Environmental, Social and Governance (ESG) consultancy in Singapore offering a wide range of sustainability services targeting the real estate and property investment market in Asia Pacific.

This collaboration is a result of EVORA and Paia’s complementarity to provide high-value ESG consultancy services such as GRESB Real Estate assessments, net zero and climate analysis, sustainability reporting and disclosures to real estate and property investment clients in Asia. 

The strategic collaboration with Paia Consulting further strengthens EVORA’s global growth plans whilst increasing the evolution and adoption of ESG principles in real estate investment in the Asia Pacific region.

Sonny Masero, EVORA Chief Strategy Officer said of the collaboration:

“EVORA Global is now serving clients in every region – investors’ concerns about ESG are becoming the norm in major markets. When seeking a partner in APAC we wanted to find one that shared our vision and values. We have found that in Paia and the leadership provided by Carrie and Corrado. They see the potential to use SIERA to enable their consultancy business to grow bigger and more efficiently, reducing the time spent by their consulting team on data collection and data quality checks. Together, our consulting businesses in partnership, will be adding value to our clients by working with the best talent and intelligence in South-East Asia and in Europe.”

Carrie Johnson, Paia Founding Director:

“This collaboration with EVORA enables Paia to bring additional value to our clients. The enriches our capability to deploy technology, access insights and experience from Europe, UK and USA for our leading real estate companies and REITs to capitalize on their sustainability efforts and initiatives. We look forward to working with Sonny and the EVORA team, bringing software solutions to our clients, and further strengthening our GRESB offerings in Asia Pacific.” 

To find out how EVORA and Paia’s partnership can help you to create more sustainable buildings and communities, please contact us today.

EVORA achieves Planet Mark certification

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We are very proud to announce that EVORA has achieved Planet Mark certification for the 8th year running.

The Planet Mark is an internationally recognised certification based on sustainability standards and its mission is to help us all contribute to a thriving planet as a collective force. The certification represents an organisation’s commitment to sustainability programmes to actively reduce environmental and social harm. 

In a key step forward, this year we have measured our social value contribution and carbon reduction.

Social value is the net social and environmental benefit generated to society by an organisation, expressed in ‘£’. In 2021, EVORA generated £24,615 in social value.

In order to measure our social value, EVORA had to submit data and evidence on a number of indicators.

These were:

  • Our People
  • Community and Volunteering
  • Donations
  • Procurement
  • Environmental Impacts

Last year, EVORA reduced its total carbon by 38.6% from the previous year, a 44.3% carbon reduction per employee.

The emissions considered have been obtained from different sources: Electricity, T&D Losses, Natural Gas, Water, Business Travel, Homeworking (excluded from footprint).

We look forward to completing the assessment again next year as we continue to drive our commitment to generate further social value opportunities and to reduce our carbon emissions yearly so that together we can all halt climate change.

“I am proud that EVORA has received the Planet Mark certification for the 8th year running. This demonstrates our commitment to delivering positive outcomes for our people, our communities, and our environment. We will use this year’s results to drive further improvements next year, maximising social value for all.“

Abigail Isherwood, Sustainability Consultant

A Quick Introduction to Social Value

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Social value has been a theme for governments and businesses for the last decade. As something that started life as a means of trying to assure positive local outcomes for projects where public money was being spent, for example for a construction company commissioned to build a school, it has evolved into a broader concept designed to ensure that all organisations are thinking about people, places, and communities in their work.

The story started in public sector procurement. Public sector bodies including Central Government departments, local authorities, and councils spend billions a year on local public goods and services in the UK. In 2012, the Social Value Act was introduced with a key aim to transform the way in which this public money was spent in England and Wales. What the Act requires is that commissioners, who procure public sector revenue contracts or capital projects, ‘consider’ how they could secure wider social, economic, and environmental benefits, named social value from these contracts. [1]

Similar legislation has also been published by the Welsh and Scottish Governments, including The Procurement Reform (Scotland) Act in 2014 and The Well-being of Future Generations (Wales) Act in 2015.

In January 2021, the Government launched the Social Value Model which requires departments to ‘explicitly evaluate’ social value in all central government contracts. [2] The Social Value Model followed from the detailed laid out in 2020’s PPN 06/20 which laid the groundwork for the Model and provided an overview of the Model’s focus. The Model sets out the Government’s goals for social value in the form of five strategic policy outcomes: COVID-19 recovery, economic inequality, climate change, equal opportunity, and wellbeing. The Government has been a key driving force for the social value movement changing the way social value is perceived within many sectors, including commercial real estate, trying to understand what social value means to them, and how the concept can be incorporated into their business activities.

A month later, UK Green Building Council (UKGBC) identified a need from the built environment to establish a definition of social value that focused on the impact that buildings, infrastructure and places have on people. The high-level definition states that “social value is created when buildings, places, and infrastructure support environmental, economic and social wellbeing, and in doing so improve the quality of life of people”. Exactly which environmental, economic and social outcomes create social value will depend on the best interests of the people most impacted by the project or built asset”. [3]

It is not surprising that, over the last few years, we have seen a rise in relevant and practical guidance documents not only from the UKGBC, but other organisations, such as Better Building Partnership (BBP), in an attempt to support businesses within the built environment with social value.

In 2018, UKGBC published an introductory guide to ‘Social value in new development’ designed to help development teams understand social value in relation to the built environment, and what they can do to improve societal outcomes from new developments [4]. The guide maps social value outcomes against several core themes, including jobs and economic growth, health, wellbeing, and the environment, and strength of community (See Table 1).

Jobs & Economic Growth Health, Wellbeing, & the Environment Strength of Community
Decent jobs for local people and hard to reach groupsGood accessibility and sustainable transportationStrong local ownership of the development
Local people with the right skills for long-term employmentResilient buildings and infrastructureExisting social fabric is protected from disruption
School leavers with aspirations of the industryHigh quality public and green spacesThe new community is well integrated into the surrounding area
The local supply chain is supported and grownGood mental healthThriving social networks
Residents have comfortable homes which are affordable to operateGood physical healthVibrant diversity of building uses and tenures
Thriving local businessesLimit resource use and wasteStrong local identity and distinctive character
Table 1: Summary of social value outcomes across new development

Questions about the incorporation of social value within property management activities has also become a popular topic of conversation amongst commercial real estate companies leading to the ‘Responsible Property Management Toolkit’ being produced by Better Buildings Partnership (BBP) in 2021.[5] The toolkit provides practical guidance for asset managers, property managers and facilities managers on embedding sustainability (incl. social value) within property management services. Guidance notes provide clarity on social value, including information on the following:

  • What is social value?
  • Social value opportunities
  • Incorporating social value within the supply chain

Many real estate companies have begun to lean on both pieces of guidance to stimulate ideas internally about how they incorporate social value within their day-to-day property management activities as well as new development projects. As ESG has leapt up the strategic agenda in the last five years, the organisations able to address each element comprehensively have positioned themselves as leaders within the ESG space. The value of building a comprehensive environmental, social and governance strategy has never been more obvious as boards and stakeholders alike demand more from those they do business with.

Typically, ESG strategies tend to focus more heavily on the ‘E’ but at EVORA our clients’ strategies contain a strong ‘S’ component which is wholly aligned to their business objectives, whilst being aligned to industry best practice, such as UKGBC and BBP amongst others. Our approach allows our clients to be confident with how they communicate social value to investors and other stakeholders allowing them to stay ahead of the curve when it comes to ESG.

Please do not hesitate to get in touch if you would like to start your social value journey with us today.

Sources

[1] Communities and Local Government. 2011. A plain English guide to the Localism Act. Department for Communities and Local Government. UK.

[2] Cabinet Office and Department for Digital, Culture, Media & Sport. 2020. Procurement Policy Note PPN 06/20 – taking account of social value in the award of central government contracts. Cabinet Office and Department for Digital, Culture, Media & Sport. UK.

[3] UKGBC. 2021. Framework for defining Social Value. UKGBC. London.

[4] UKGBC. 2018 Social Value in new development: An introductory guide for local authorities and development teams. UKGBC. London.

[5] Better Building Partnership. 2021. Responsible Property Management Toolkit. pp. 43-46.

GRESB 2022 is almost here! Are you ready?

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At EVORA we are already preparing our clients and ourselves for the next GRESB cycle. Because, like spring, it is just around the corner.

Every year, the GRESB portal opens its doors on April 1st and closes them on July 1st. During this time, the wires to Amsterdam run hot and there are many sleepless nights for some participants. “If it weren’t for the last minute, nothing would ever get done”, as Mark Twain said.

So, what are the challenges and key deliverables of a GRESB submission?

Data. Data. Data.

Data Coverage is a big deal at GRESB and nearly one-third of the points are linked to consumption data such as energy, carbon, water and waste data. Even if data collation sounds simple, it is not in real life. Data coverage on asset-level can be particularly challenging, especially in the absence of AMR (Automatic Meter Reading). However, data collection alone is not enough. It is crucial to understand the data and to identify inconsistencies. This is where our in-house developed software SIERA enters the scene; not only for GRESB submissions but generally to better understand how efficient buildings are within a portfolio.

SIERA was specifically developed for the real estate investment market. It is a platform that enables a highly effective collection of quantitative and qualitative GRESB data, including comprehensive automated verification and intelligent modelling to achieve accurate and transparent disclosure of asset-level performance data. The SIERA GRESB module enables direct submission to the GRESB portal.

GRESB started requiring asset-level performance data (in the sense of consumption data such as energy, water, greenhouse gases, and waste) last year. Previously, this was at the fund level, which of course means that the data reported to GRESB is now much more detailed. This has not changed anything for SIERA users. However, we at EVORA believe that this is not the end of the journey. Our gut feeling tells us that GRESB will increasingly cover the topic of resilience in the future. And here, too, the Net Zero Carbon Module of SIERA offers the opportunity to create simulations that are aligned with the science-based targets of the Paris Agreement, for example.

But GRESB is not only about performance data, and neither is SIERA. When it comes to providing data on efficiency measures taken in terms of water, energy and/or waste, SIERA offers another very helpful feature: the software collects data by using surveys specifically aligned to the GRESB question set. The surveys can be sent individually for each building to, for example, the responsible property manager who may answer the questions online. The responses are sent directly to SIERA so that the overall picture of the condition of an asset becomes more and more complete.

But coming back to the GRESB cycle.

The picture is as complete as possible, which means all available and relevant data is checked, prepared and verified and finally pushed through the GRESB portal. What happens next? The adrenalin level drops, and we wait until October. But do we really?

In fact, in October, the GRESB results are released, providing not only an overview of how the submitted fund is positioned from a GRESB perspective but – and this is where it gets exciting – also where the fund stands relative to its peers.

Additionally, strengths and weaknesses, as well as potentials, are made comprehensible not only through figures, but also through a series of descriptive graphics.

And what happens in the meantime? We at EVORA will provide our clients with an outlook of the predicted score (as far as it is possible) and an overview of the identified gaps and potentials so that the client has the chance to decide about possible improvement measures in terms of ESG at the half-year. It is important because the same applies to GRESB: standing still leads to falling behind.

However, an ESG strategy should not be a reaction to the GRESB results alone but should exist and be implemented across the board. The GRESB results will help to stay on track and SIERA can support your decision making.

So, the “plan – do – check – act” wheel for ESG measures ideally rolls on continuously and independently of GRESB deadlines. In this way, an ESG strategy can be implemented effectively so that it again has a positive impact on GRESB scoring.

As well as being a GRESB Global Partner, EVORA is also a GRESB leader. In the 2021 cycle, we were supporting over 150 submissions, which is equal to 20% of all Europe’s submissions.

We at EVORA are happy to support you in optimising the ESG & GRESB performance for your fund and your company, and in getting your ESG wheel rolling!

Interested in finding out more? Contact our experts today.

Generalist Advisory Vs Sector Specialism

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The commercial real asset market is evolving rapidly, and it’s no secret ESG is driving this evolution as the world transitions to a net zero economy. As a result, staying on top of ESG issues and applying them effectively to real asset investment and management is critical to keep up with the pace.

The role consultancies play is becoming increasingly important as firms are relying on ESG advisory services more than ever. Yet, despite the significance of the real asset sector, real asset ESG is still a niche area in the sustainability landscape. This begs the question, how can consultancies provide adequate ESG solutions for the real asset industry?

EVORA believes generalist ESG services for example, from a multidisciplinary professional service provider, often do not go far enough in providing the industry with the sector specific solutions it demands. Net zero carbon, TCFD and SFDR are vastly different in their application to real estate vs other asset classes. As such, expert sustainability knowledge in this field is vital.

EVORA is one of the only sustainability consultancy and software providers solely focused on the real asset industry, and with close to 100 ESG professionals is also one of the largest, and growing. Offering end-to-end ESG solutions, we believe our depth and breadth of knowledge in the industry is unrivalled. What sets EVORA apart? Our ability to break down complex issues, such as regulation and climate risk into simple, practical outcomes specifically for real asset professionals. If you’re feeling overwhelmed with navigating the ever-changing landscape, a great place to start is our ESG Training Academy, EVOLVE, designed to translate the vocabulary of ESG into everyday language.

Whatever issues investment and asset managers are faced with, one topic inevitably crops up: data. Data is one of the primary causes of confusion and complexity in the industry and, as such, poses a significant risk when making ESG-informed investment decisions. This fundamental component is one that EVORA has built its foundation on over the last 10 years through our proprietary ESG data management platform for real asset professionals, SIERA. SIERA, which spans 26 countries, is built around the principles of investment grade data and simplifies vast, fragmented data sets into accurate, consolidated ESG indicators to inform decisions at the asset, product and corporate level.

Although our consultancy and software services can be delivered independently, our clients recognise the benefits of combining the two. Interpreting ESG data and being able to answer the often asked “so what?” question requires a deep understanding of not just ESG, but the relation it has to the real asset industry. We firmly believe our ability to join the dots for our clients is where we add the most value. Our outcome and action-focused approach ultimately leads to positive change, helping to deliver on our vision: To accelerate the evolution and adoption of real asset sustainability to enhance the well-being of the planet and its people.

If you want to futureproof your business, choosing a dedicated real asset consultancy and software, we believe, is by far the safest bet.

What did we learn from our first EVORA Insight’s lunch on the topic of how ESG is being integrated into investment decision-making?

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The gap in expectations between the leaders and the majority of investment managers is huge. Even the leaders don’t think they are doing anywhere near enough. To be honest, it’s a little disheartening.

Organisational change and capacity building is being hampered by structural changes, which cannot be solved by each firm on their own. For instance, the historically low price of gas as a common fossil fuel, compared to electricity which can be net zero carbon, presents an affordability challenge. Also, the lack of availability of standardised and simplified ESG data to inform investment decisions and to understand the underlying risks. To gather ESG data, particularly for a whole building, is still a time-intensive process requiring active engagement with tenants and other stakeholders, without regulatory support in many countries.

However, there are choices that companies can make to include ESG factors as standard practice. To include ESG representation in the IC and to decide on ESG “red lines”. More often than not, assets are being acquired with little or no considerations of ESG risks and opportunities pre-transition. For some funds, this is the only opportunity to incorporate these factors and budget accordingly, particularly when future income could be compromised. Notwithstanding the need for ESG data to be readily available at the time of the transaction, during a period in the market when there is an insufficient supply of properties to meet the demands of available capital allowing little time to consider non-financial considerations.

We ask our clients to think about ESG over the timeframe of two hold periods – to consider how ESG will be priced into the exit value. There is little room to do this effectively under present market conditions, in part due to the uncertainty of how to interpret financial impacts of climate projections, and because pricing in that risk may result in losing the deal. There is anecdotal evidence of buyers winning and losing deals with risk-adjusted pricing, which most often appears to be through the incorporation of the costs of decarbonisation/adaptation measures or an adjustment to the cap rate at exit as a proxy for perceived future risk. More observational data is needed to understand under what conditions these price adjustments are and are not resulting in winning deals.

Some companies know that the reliance on GRESB ratings and EPC data, which don’t measure actual performance, is insufficient to understand the underlying risks and opportunities. Making the right investment decisions requires technical and operational insights, when there is a shortage of these skills and to get the right experience it requires support from multiple consultancies. However, it seems inevitable that certifications and ratings will continue to be used as a short cut.

With the background of the environmental sciences telling us that we are running out of time to tackle the global issues of climate change, destruction of biodiversity, and pollution of the land, water and air. Social inequalities are generating unrest in our communities. It has left us wondering how do we change the philosophical principles on which real asset investment has been grown on over the last 50-60 years. Is the only way forward a ratcheting up of regulations to force change, which would require proactive involvement from investment managers in policy discussions for finance, sustainability and buildings to be successful?

Over the last couple of years there have been reasons for optimism that real estate investment and finance is starting to change for the better, these include market indicators like:

  • Investor pressure to explain ESG and climate risk policies is increasing and tougher questions are being asked, although how this information is used in unclear
  • More individuals throughout real estate investment firms, and outside of the traditional sustainability team, are being required to take responsibility for ESG
  • ESG and climate risk are showing up on performance objectives for more staff
  • Valuers are starting to query for data on EPC ratings to incorporate into valuations, and market analysts are using this information to review income projections. 

So, looking ahead to 2050. When people look back to this period of change happening today and see what an exciting time we have lived through, will you be one of those who can say that you joined us to push ESG integration forwards successfully or will the transition come too late given the scale of the changes we have to make?

The case for ESG in Real Estate Debt

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Over the preceding decades, ESG has morphed from a niche add-on to a core part of any sensible investing strategy. Indeed, Standard Chartered estimates that $1 in every $4 is now invested in ESG. As ESG increasingly factors into investment decisions across the market, the case for real estate debt to consider ESG risk grows.

And it is easy to see why. ESG risks consistently feature in the World Economic Forum’s annual Global Risk Reports. For 2021, climate action failure and human-led environmental damage were among both the highest likelihood and highest impact risks of the next decade.

It is widely accepted that the next 10 years are crucial for tackling the climate crisis. Despite a temporary drop in GHG emissions resulting from the coronavirus pandemic, overall trends are that they continue to rise. With the race to net zero carbon one of the major global challenges facing the built environment, and one which is being targeted by corporates and governments alike, paying attention to ESG issues in real estate investing strategies has never been so critical.

The possibility of being left with stranded assets due to investment strategies being out of sync with emissions trajectories is fast becoming a reality. As we see regulations tighten, for example, minimum energy efficiency criteria for buildings, the reality is that these types of risks must be taken into consideration. Securing financing against an asset that could be unlettable in just a few years is not an attractive offer. As such, across the commercial real estate financial market, there is increasing pressure to disclose and mitigate ESG risk. And this extends to real estate debt.

Globally, green bonds and loans along with other types of sustainable debt rose to $465 billion in 2019 – an increase of 78% from 2018 (data compiled by BloombergNEF). These figures demonstrate that ESG is fast becoming a material consideration in debt financing. At EVORA we see this trend continuing, with the pandemic only heightening tenant and consumer expectations that the spaces they occupy positively impact on social and environmental considerations.

Sustainable real estate debt financing has grown rapidly over the last decade as alternative lending is increasingly sought. We see the momentum in this space continuing, and as the opportunities in this area continue to grow, early and effective ESG integration will be key.

EVORA works with clients helping them to develop ESG strategies and green debt frameworks, if you would like to discuss this you can contact us at contactus@evoraglobal.com

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