SINGU Team
ESG Contents
Over the last decade, we have been made increasingly aware of the looming threat of climate change. From the ominous headlines which predict sea levels rising by three centimetres by the year 2030, to the increase in environmentally informed policies in government, this pressing issue has become the proverbial elephant in the room.
Like most industries, the commercial real estate sector is undergoing a cultural shift to accommodate the changing attitudes towards the environment and climate change, reorientating itself to promote sustainability through intelligently designed initiatives and policies aimed at every stage of production and asset management. And for good reason. The real estate industry is responsible for 37% of total emissions globally, and 40% of the consumption of resources and energy. This means that property investors and managers bear a large portion of the responsibility for tackling this global issue, particularly in the eyes of the public and governments. In order to tackle this issue, businesses first need to identify suitable sustainability metrics for commercial real estate. These metrics, commonly referred to as key performance indicators (KPIs) can then be built into business protocols and decision making processes. ESG data collection plays a crucial role in addressing climate change and promoting sustainability in the real estate sector.
What are the key benefits of pursuing sustainability?
Sales value uplift
While many would argue that we each have an ethical obligation to reduce our carbon footprint, the additional incentives to shift towards a greener model in commercial real estate are now becoming more transparent. Perhaps the most enticing incentive for many property investors lies in the increased sales value that green buildings provide. Reports around earnings from prime central office locations in central cities have shown that green buildings are currently netting a 12.3% uplift in sales value and rental yield on average, when compared with ‘brown buildings.’ Green buildings attract a premium in the market due to the increased energy efficiency they provide, reducing costs for business owners. Many businesses are also trying to create or maintain a socially responsible reputation, and so will pay more for green premises to achieve this aim. Strong ESG performance can further enhance the sales value and rental yield of green buildings by ensuring accurate and compliant sustainability metrics, which improve decision-making and transparency for stakeholders.
Brand Reputation
There are also indirect financial incentives to adopting greener models, aside from the direct increase in sales value. As climate change climbs the ladder in terms of the collective issues we face, consumers and business owners are beginning to respect and value ‘green businesses’ more, and this is reflected in their purchasing decisions. Adopting a greener model ensures that your CRE brand is growing in the right direction and keeping up with the times. Additionally, producing accurate, auditable ESG data is crucial for building and maintaining a socially responsible reputation.
Protection of assets and risk management
Though slightly bigger picture, tackling climate issues by adopting a greener model, will in the long run protect your assets. If climate change is not halted, many commercial buildings will be physically affected by climate change. For example, an increase in sea levels is likely to cause flooding, while sustained increases in temperatures may negatively impact the lifespan of a building. Integrating risk management into ESG platforms is crucial for protecting assets against these climate change impacts.
What is ESG?
ESG stands for Environmental, Social, and Governance, a set of criteria used to evaluate a company’s commitment to sustainable and ethical practices. As the world becomes more conscious of the impact businesses have on the planet and society, ESG has emerged as a crucial framework for assessing a company’s risk and performance in these areas. By focusing on ESG, companies can demonstrate their dedication to bettering the world while also enhancing their market reputation and operational resilience.
Understanding the components of ESG
The three components of ESG are:
Environmental: This aspect evaluates a company’s impact on the natural environment. It includes factors such as climate change, resource depletion, waste management, and pollution. Companies that excel in this area implement practices that reduce their carbon footprint, conserve resources, and minimize environmental harm.
Social: This component assesses a company’s relationships with its employees, customers, and communities. It covers labor practices, human rights, diversity and inclusion, and community engagement. Companies that prioritize social responsibility foster a positive workplace culture, support fair labor practices, and contribute to the well-being of the communities they operate in.
Governance: Governance refers to the internal systems and controls a company uses to govern itself. This includes board composition, executive compensation, audit practices, and shareholder rights. Strong governance ensures that a company operates transparently, ethically, and in the best interests of its stakeholders.
How ESG relates to sustainability
ESG is intrinsically linked to sustainability, providing a structured approach for companies to measure and report their sustainability performance. Sustainability encompasses a company’s ability to operate in an environmentally, socially, and economically sustainable manner over the long term. ESG reporting offers stakeholders detailed insights into a company’s sustainability efforts, enabling them to make informed decisions based on comprehensive data. By integrating ESG metrics into their reporting processes, companies can track their progress, identify areas for improvement, and demonstrate their commitment to sustainable practices.
Which KPIs should you target to promote ESG reporting?
When it comes to identifying sustainability metrics for commercial real estate, there a range of key performance indicators that are widely adopted by businesses. These include energy demand and consumption, resource efficiency metrics, water demand and consumption, and greenhouse gas emissions. These all have a tangible impact on sustainability, as well as an impact on property value. Most of these KPIs are self-explanatory, though there is some nuance to carbon emissions, which is split into three scopes. Scopes 1 and 2 refer to direct emissions and indirect emissions respectively, while scope 3 encompasses emissions that are not directly produced by a property or business, but that it is responsible for in some way at some point in the value chain. When selecting KPIs relating to carbon emissions, consider which scope these fall under. You may decide to have an overarching KPI around total emissions, as well as more specific KPIs relating to each scope. Ensuring data accuracy in recording and tracking these KPIs is crucial for effective ESG management.
The key here is to adopt KPIs which promote sustainability but that are simultaneously tailored to your business plan and objectives. They should provide investors and shareholders with context, while sending an on-brand message. Effective data management solutions are essential in ensuring compliance with regulatory standards and enhancing transparency across business systems.
Avoid misleading KPIs
It’s important to avoid falling into the trap of targeting KPIs which improve your brand reputation but offer no tangible benefit to the business. When deciding on KPIs to monitor and pursue, make sure to ask yourself how the KPI will affect your asset health and longevity. Additionally, ensure that any KPIs you currently use have a clear rationale behind them. Sometimes, businesses fail to reflect on past practices and decisions which may have been designed poorly or in haste, instead adopting a mantra of ‘don’t ask, don’t tell.’ This often takes an amount of humility and acceptance of past mistakes.
Record KPIs effectively for ESG data collection
Once you have decided on the KPIs you want to pursue, you need to establish your starting point and definitive targets for each KPI. Finally, you need to ensure you have a robust, and ideally automated method, of recording KPI data. ESG software plays a crucial role in automating and streamlining the reporting process. Remember, well designed and tailored KPIs mean nothing unless they are recorded accurately and at suitable intervals.
ESG software can streamline ESG reporting and ensure data accuracy.
Difference Between ESG and Sustainability Reporting
While ESG and sustainability reporting are closely related, they serve distinct purposes and provide different types of information.
Clarifying the distinctions
Sustainability reporting is a broad concept that encompasses a company’s overall sustainability performance, including its environmental, social, and economic impacts. It typically includes information on the company’s sustainability strategy, goals, and achievements, as well as its broader impact on the environment, society, and the economy.
ESG reporting, on the other hand, is a more focused subset of sustainability reporting. It zeroes in on the environmental, social, and governance aspects of a company’s performance. ESG reports provide detailed information on specific ESG metrics, targets, and the company’s progress towards achieving those targets. This level of detail helps stakeholders understand how well a company is managing its ESG-related risks and opportunities.
In summary, while sustainability reporting offers a comprehensive overview of a company’s sustainability efforts, ESG reporting provides a deeper dive into the specific areas of environmental, social, and governance performance. Both types of reporting are essential for demonstrating a company’s commitment to sustainability and for providing stakeholders with the information they need to assess the company’s long-term viability and ethical standing.
Conclusion
While deciding on sustainable metrics for commercial real estate can feel like a puzzling dilemma, it is worth trying to view this as an opportunity rather than something imposed upon you. There are great rewards available to businesses who are willing to adapt to the times and place sustainability at the centre of design principles and business protocols. Well-designed KPIs act as a catalyst for promoting not only your success in business, but a more sustainable future. So, start with the low hanging fruit and go from there. Additionally, utilizing ESG reporting software can significantly enhance the reporting process for companies focused on environmental, social, and governance metrics.
Incorporating ESG reporting capabilities into your strategy helps organizations streamline ESG data collection and enhance their overall reporting activities for better strategic decision-making.
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