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Real Estate

Global ESG Real Estate Goals - Are we aligned on our KPIs?

May 05, 2021

The GRI Global ESG & Impact Investment Committee gathered C-Level real estate investors, asset owners, lenders and developers in April 2021 to have a closer look at factors and indicators real estate leaders consider as key for successful ESG strategies across the world and what KPIs they set to achieve them.

While the Paris Agreement and the European taxonomy laws are seen across the Western world as the key regulatory milestones for the industry, it seems that many real estate companies have set themselves much more ambitious targets. Among the most common goals in ESG strategies, reducing carbon emissions and committing to the net carbon pathway are playing a major role in investment, transaction and development decisions. However, while setting an overarching goal is the first step, ESG leaders also need to understand and develop KPIs to reach them to be able to create targets that are ambitious and efficient but also achievable. Most members agreed that key for hitting their targets would be a clear alignment of the whole market, especially with more and more considerations from governments to regulate embodied carbon

When it comes to establishing KPIs there seems to be no mainstream industry approach at this point. Depending on the target that has been set and the portfolio of a company, some leaders are employing a top down approach while others are trying to understand what will be needed for every single asset in their portfolio. It also needs to be taken into consideration if companies commit to reducing operational or embodied carbon, which creates a complicated matrix between landlords, asset managers, tenants and developers. Some members suggested that it would be crucial to understand ESG strategies not as separated units between E, S and G, but to see them as a potential systemic evaluation framework that could offer more opportunities to integrate different KPIs.

One of the key challenges that members identified on their net carbon pathway were embodied emissions. Most investors are focusing on greenfield new builds within their ESG strategies, but the majority of the global existing stock is currently brownfield and will need to be retrofitted to meet industry standards. And while new developments might match the current net zero pathways, once embodied carbon will be taken into account by regulators this could mean a big step back for some ESG strategies. However, brownfield assets, especially those without potential to be retrofitted, offer options to be recycled or reused. At the same time, this also opens doors for value add possibilities to buy cheap and sell green.

Another push for retrofitting or recycling brownfield is also the risk of being left with obsolete assets across portfolios. With valuers taking ESG strategies and carbon emissions more and more into account, the coming years could see discounts for brown assets and some institutional investors have already stopped buying brownfields that have no option to be transformed into greenfield assets. Interesting to see will also be how governments will react to brown assets in the future, as some countries that are heavily involved in pushing ESG agendas have tightened their regulations already, such as the Netherlands that will require certain levels of energy efficiency for all office buildings from 2023 and those non compliant will be prohibited. 

From a financing perspective, many lenders are already offering discounts for greenfields and while this might have limited impact on overall yields considering the low interest rate environment, more and more lenders are committing to financing brownfield redevelopments. This is also supported by governments making it increasingly difficult to finance brown developments going forward. However, the question remains whether capital requirements in the future will see more capital relief for green assets or implement additional charges for brownfields.

Looking across the globe, most real estate companies seem to go through similar challenges when it comes to ESG strategies and their implementation. With the growing attention of governments worldwide on this topic most are positive that regulations will become tighter within the next years and decade. Members agreed that looking ahead and designing assets now with the tenant of the future in mind will be key to safeguard portfolios from obsolescence and drive the ESG agenda.

The conversation continues during our next Committee Meeting in June 2021.

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