"Sustainability" and "development" do not often go to the dance together, but that may be changing. Today's real estate investors are embracing their interconnection, and encouraging environmental social governance (ESG) within the industry. With the rise in environmental consciousness that has accompanied global climate change, sustainability reporting has become an increasingly important tool for real estate investors who wish to engage in socially responsible investing.
Sustainability disclosure, in the context of real estate investment and development, goes beyond the LEED-type standards which assess building data. It is the process by which organizational performance on ESG activities are communicated. The attributes which make up sustainability disclosures are complex, and broadly defined. For example, reports on financial performance will include societal impacts, beyond typical monetary data; environmental performance reports assess the company's impact on local habitats and global natural resources; reports on social performance include human and societal impacts on employees and community; and governance reports encompass the oversight, management, and accountability behind each other component.
The goal of sustainability reporting is to enhance and protect shareholder value by increasing transparency in environmental and social practices, which can materially affect the business. For the most part, however, sustainability disclosure is not mandatory or standardized. Other than in a handful of cities and states, there is no legislative requirement for a company to report its environmental social governance or sustainability data (though proposals have been made to integrate sustainability reporting into standard SEC filings).
Nevertheless, voluntary integration of financial and non-financial reporting is becoming increasingly prevalent. The most popular aggregator of sustainability reporting data is the Global Real Estate Sustainability Benchmark (GRESB). GRESB, since its inception in 2009, has developed a global reporting standard to convey sustainability data to investors in public and private real estate funds and portfolios through an annual survey. This industry-driven organization is supported by over 100 institutional investors, representing $6.1 billion in assets.
GRESB analyzes self-reported and institutionally verified information from property companies and private funds on seven aspects of sustainability: management, policy and disclosure, risks and opportunities, monitoring and environmental management systems, performance indicators (such as energy, GHG emissions, water, and waste), building certifications, and stakeholder engagement (with employees, tenants, and the community). Each company or fund is given a score, out of 100, which reflects how embedded sustainability principles are within the organization as compared to its peers.
The 2014 GRESB Report and sustainability data will be revealed internationally in early September to the GRESB participants, as well as to their investor property companies and equity real estate funds. This information can be used to help direct investments away from companies with environmentally damaging practices and towards entities that effectively engage in ESG. It could also add another, welcome component to the environmental due diligence process in commercial real estate transactions.