Sustainability is renowned as a sector replete with technical jargon and acronyms that confuse and frustrate, particularly those who don't speak fluent sustainability. Reporting seems to be especially prone to this vice, which can seriously undermine progress as the non-technical user of information struggles to find clear meaning in a landscape of seemingly interchangeable but ultimately different sets of data, reporting tools and terms. As awareness of environmental, social and governance (ESG) risks and opportunities accelerates, investor expectations of sustainability performance and reporting have similarly increased; companies' and funds' sustainability credentials are very much under the spotlight. So, in the hope of providing a little assistance, this article attempts to establish some clarity around reporting frameworks, standards, benchmarks and certification schemes.
Firstly, frameworks. Examples include those established by the Global Reporting Initiative (GRI) and the Integrated Reporting Council (IRC) along with mandatory reporting frameworks such as the Greenhouse Gas (GHG) Emissions and Governance requirements of the Companies Act 2006 in the UK. The latest addition to this set, and potentially one of the most impactful, are the recommendations of the Task Force for Climate-related Financial Disclosures (TCFD).
These frameworks provide a reporting standard in exactly the same way an accounting framework does for financial reporting: they set out what to include in a report for it to be compliant with the standard. All companies reporting to the standard will cover similar topics, making a comparison between them easier. The use of such a framework provides absolutely no indication of how sustainable a company or fund may be. For that, you need to analyse what is actually being reported. Such analysis should reveal, for example, a company's strategic approach to sustainability and key material issues. Following the framework is increasingly expected as good practice and provides some level of commonality across entities to compare.
Again, the use of these standards will not reveal the extent of an entity's sustainability performance. For that, you need to analyse what is actually being reported. A number of different reporting standards have sprung up in recent years, which can add to the confusion. However, there are efforts to ensure the standards they set are similar. For example, the INREV and EPRA standards are broadly aligned, among the others, on like-for-like and intensities definitions.
So, on to sustainability benchmark and index providers. These include MSCI, FTSE for Good, the Dow Jones Sustainability Index (DJSI), Vigeo, the Carbon Disclosure Project (CDP) and many others. The most well-known real estate specific benchmark is the Global Real Estate Sustainability Benchmark (GRESB).
There has long been a call for a single metric that can be used to compare sustainability performance across businesses, giving rise to a lot of service and data providers promising to do that very thing. Inevitably, they never achieve the desired goal of revealing the full picture of an investible entity's sustainability performance in a single number. This is mainly because the variables that determine sustainability performance are too complex to be meaningfully reduced to a single digit. That's not to say such systems aren't useful. They collate significant quantities of data. In so doing, they have driven the adoption of the reporting frameworks and standards outlined above, improving the robustness of sustainability data and, with it, cross-sector understanding of performance. Data users are getting much more and much better data now than, say, ten years ago.
They also provide a short-hand for benchmarking sustainability performance. However, this is a very blunt tool for decision-making. A single number or benchmark rating cannot fully reveal the sustainability performance and, with it, the potential sustainability risks and opportunities of an entity. For that, you need to analyse what is actually being reported. Just as we understand from the financial sector, benchmarks, rankings and ratings can only make up part of the picture. It is the data behind the scores and the trends within that data that tell the story, and it is imperative that this is analysed for performance to be fully understood. Investors that use these platforms effectively do this, but it takes investment in time, expertise and resource. While the risks and opportunities inherent within sustainability performance remain undervalued, there is a tendency to underinvest in these resources.
The Better Buildings Partnership (BBP) developed the Real Estate Environment Benchmark (REEB) for the UK market some ten years ago. This also focuses on operational energy performance-in-use and covers office and retail assets. By collecting data from a comprehensive population of assets, these systems establish benchmarks of good or best practice across a specific sector, against which asset owners and managers can compare the performance of a specific building. The benchmarks and methodology behind them are publicly available. This level of transparency on how benchmarks are produced is essential for them to be useful.
Energy Performance Certificates (EPCs), which are prevalent across Europe following the implementation of the EU Energy Performance of Buildings Directive, normally reveal how much energy a building was designed to use for heating, cooling and lighting. This may have little bearing on the amount it actually uses. However, the introduction of EPCs has been very effective in driving awareness of building energy performance. The setting of minimum EPC standards as a legal compliance matter in the UK has moved the market forward again significantly but in a controlled and well-signposted way.
The risks and opportunities presented by sustainability are complex and developing quickly. The exposure of real estate assets to those risks and opportunities is becoming better understood but has revealed a market need for data, and that is inevitably generating a wide range of commercial services. As with any developing area, it is ultimately the responsibility of the investors and investees to make sure we understand how our assets are implicated and communicate that in a clear and meaningful way to the market. Ultimately, this requires investment in dedicated resources just as any strategic business risk issue does.
If you are struggling to navigate your way through the sustainability alphabet, hopefully this article will have helped. If you want to understand sustainability risks and opportunities in your fund or portfolio, it won't be enough.
