Sustainability benchmarks, frameworks and certification schemes - How well do you speak sustainability?

Louise Ellison

Louise Ellison is the Group Head of Sustainability at Hammerson plc. She leads a team of 6 people, responsible for establishing and delivering Hammerson’s sustainability programme, Positive Places across their property portfolios in the UK, France and Ireland. Hammerson is an industry leader in sustainability, consistently delivering new initiatives alongside year on year operational efficiencies. In 2017 the company launched a target of becoming Net Positive in carbon emissions, resource use, water demand and socio-economic impacts by 2030. Louise’s external roles include Chairmanship of the Better Buildings Partnership, an organisation of 30 commercial property landlords committed to improving the environmental performance of their portfolios. Her other external roles include Chaimanship of the EPRA Sustainability Committee, membership of the Green Construction Board, a joint industry-Government initiative to support better environmental performance across the sector and the Responsible Business Board of Mace. She was previously Head of Sustainability at Quintain Estates and Development plc and Research Director at Investment Property Forum.

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.
Next come reporting standards. Examples include EPRA's Sustainability Best Practices Recommendations (sBPR), the INREV Sustainability Reporting Recommendations and the Sustainability Accounting Standards Board (SASB) guidelines. These set out how entities need to report specific things, again in the same way an accounting standard does. They set common ground rules to ensure that when, for example, comparing carbon emissions across different funds, they are reported on a comparable basis. This is particularly important for real estate where portfolios change frequently and different asset types have very different energy profiles and jurisdictions very different carbon factors[1]. Data reporting must, therefore, be standardised to be meaningful.
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.
Benchmarks are emerging that focus on a particular element of performance. The National Australian Built Environment Rating System (NABERS)[2], the operational energy benchmarking scheme that originated in Australia, is one. Its focus is operational energy performance-in-use of office buildings. It has been highly successful in driving better energy performance in the Australian office market; the best-performing office buildings in Melbourne have moved from using on average approximately 150kWh/m2 p.a. in electricity to a little over 50kWh/m2 p.a. since NABERS launched in 2002. At least some of this can be attributed to the profile the system has given to energy. So, benchmarks can be extremely effective.
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.
The final area to cover here is certification schemes. BREEAM and LEED are probably the best known environmental certification schemes for real estate, but there are many others. Owning or managing assets with these certificates, again, does not indicate the strength of an entity's approach to sustainability. It indicates that a building was designed and, if the post-construction certificate is also held, built in such a way as to achieve a minimum number of points within the relevant certification scheme's scoring system. These schemes have been powerful in driving change within the industry, but they reveal little of the sustainability performance of the entity holding the assets and, ultimately, include a very limited quantum of the investible stock[3]. The certificates are also time-sensitive. A building rated as BREEAM Excellent or LEED Gold in 2009 will be built to different standards than one similarly rated today.
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.

1. Carbon Factors are the number you multiply a unit of any particular fuel by to calculate its CO2 equivalent.  The current carbon factor for grid electricity in the UK is 0.2556 kg CO2e per kWh. In Ireland it is 0.413, in France it is 0.0526.

2. NABERS and REEB also rate for carbon emissions, waste and water management.

3. Almost 600,000 certificates have been issued by BRE under its key rating schemes, BREEAM, CEEQUAL and Home Quality Mark (HQM) across the world.  There are over 1.8 million non-domestic structures in England and about 25 million homes in the UK.