For many involved in real estate, problems such as a lack of affordable housing or excessive contributions to global carbon emissions are now becoming obvious. Accordingly, two-thirds of real estate investors are looking to increase their allocation to ‘sustainable properties’. This changing investor demand coupled with tougher regulations and new financing initiatives has led to a realisation in the real estate industry that poor ESG performance will damage future returns. However, only now that the industry is turning its attention towards rectifying these material issues has it discovered that ESG problems are far more systemic, rooted in the misaligned and opaque ESG reporting standards and accreditations adopted to govern the industry.
There is remarkable confusion surrounding how the real estate industry benchmarks and rewards ESG performance. Investors are looking for reliable objective evidence that the projects they fund are genuinely sustainable. However, the nature of real estate as an unregulated industry means that there is no obligation, nor indeed a common standard, through which organisations are required to disclose their ESG performance, nor to pass on design or operational consumption data, both of which could be used to improve future asset performance under new ownership. Subsequently, a maze containing 20 mainstream, subjective portfolio level accreditations and over 600 asset level accreditations makes it hard to identify what constitutes good ESG performance and the true ESG risk profile of assets is almost impossible to attain. Such are the pitfalls of the current ESG benchmarking system that less than 1% of the global commercial building stock has been certified.
In March 2021, we held a design thinking workshop which uncovered six everyday questions to which real estate owner and operators have failed to find solutions, resulting from this lack of ESG data transparency. These are: