How can Real Estate Investors measure ESG performance?

As ESG criteria become more prevalent, investors are taking steps to implement changes, mitigate risks and protect returns. As governments and industry bodies enforce green reporting standards, we have seen the number of ESG regulations affecting property development, property owners and real estate investors in both residential and commercial real estate significantly increase over the last decade. Green building codes are tightening and mandating higher requirements from a building’s sustainability performance.

We have noticed “green leases” between landlords and tenants, which aim to hit certain environmental objectives, are becoming a more common tool for real estate investors to monitor and drive the environmental performance of their real estate asset management. For example, the City Square Mall in Singapore had all tenants agree to adopt green practices within its premises. The mall has auto-lighting on escalators and in car parks, high-efficiency air conditioners and Variable Air Volume technology help moderate the mall’s temperature, saving energy and limiting the emission to no more than 4,000 tons of carbon dioxide annually.

In Australia, the National Australian Built Environment Rating System (NABERS), which is now mandatory for commercial real estate larger than 1,000 sq. m., has facilitated an 35% average reduction of energy consumption and reduced carbon dioxide emissions by around 50% in participating buildings, with some buildings reducing energy consumption by as much as 80%.

Over the past year in Hong Kong SAR, electricity prices have increased by 15% to 25%. This is a clear indicator of the drive to reduce energy usage, with the HKEX now requiring all listed companies to create annual ESG reports.

These trends suggest clear implications for real estate investors: Green buildings, incur lower operating and maintenance costs, while commanding higher rental yields and higher capital values.

As the real estate investment market attempts to monitor and evaluate asset-level ESG performance, we expect the use of benchmarking tools such as the Global Real Estate Sustainability Benchmark (GRESB) to become increasingly prominent.

Established in 2009, GRESB has become the leading ESG benchmark for infrastructure and real estate investments across the world. It is now used by 150 institutional and financial investors to inform decision-making. This year, 50 companies will be engaged and invited to participate in the GRESB Real Estate Assessment. This is an increase from last year, in which 13 investors collaborated with GRESB to reach out to more than 30 companies in nine Asian markets.

Investors supporting the engagement include:

Aegon Asset Management
AEW
B&I Capital
BMO Global Asset Management
Bouwinvest
CenterSquare
Cohen & Steers
Heitman
JP Morgan Asset Management
Legal & General Investment Management
MFS Investment Management
Quay Global Investors
Resolution Capital
Schroders

We anticipate ESG data, and measurements for this data, will be crucial in the future of real estate, enabling investors to use benchmarks and frameworks that are critical to their business to make informed decisions about asset performance.

Sources

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Ben Watt

Managing Director | Partner, Hong Kong

+852 6447 6750

ben@aurexgroup.com

Sally Tremlett

Managing Director | Partner, Australia

+61 451 494 354

sally@aurexgroup.com