24 Aug 2022
Birdhouse in the tree

ESG in real estate: five questions organizations should consider

Authors
Kyle Bolden

EY US-East Region Market Segment Leader – Real Estate, Hospitality and Construction Sector

Trusted advisor to high-growth companies that are transforming the real estate industry through innovation.

Christopher M. Johnston

Americas REIT Leader and US West Region Assurance Leader – Real Estate, Hospitality & Construction

Helping large global institutional investors, public REITs, emerging growth companies and entrepreneurs seek capital to create enterprise value.

24 Aug 2022

A more strategic and holistic approach to environmental, social and governance issues is helping to create long-term value for real estate organizations.

In brief:

  • An effective ESG strategy is built on an understanding of key internal and external stakeholder needs that are then prioritized by what will have the most material impact.
  • Establishing measurable ESG performance outcomes and an organizational support structure that contributes to and governs ESG initiatives is critical to enabling ongoing progress.
  • ESG-related reporting requirements, including the expected finalization of the Security and Exchange Commission’s proposed climate disclosure rule, the International Sustainability Standards Board’s exposure draft on sustainability-related disclosures, and public company reporting requirements already established by other rulemaking entities around the world are moving companies towards action.

Environmental, social and governance (ESG) efforts among many real estate companies have been focused on specific environmental initiatives and voluntary disclosures — but, in our experience, that almost always becomes a catalyst for rethinking strategic priorities, business processes, risks and opportunities.

Among leading companies, this more strategic “next-level” approach is being viewed as a business imperative to drive long-term value for all stakeholders, including employees, customers, shareholders and society at large. The following five questions are important to consider as your real estate organization takes a less reactionary and more strategic approach to ramping up its ESG efforts to remain resilient and competitive in the marketplace.

 

  • 1. What internal and external forces are driving your real estate organization’s ESG needs?

    Identify the internal and external stakeholders that are essential to your organization’s growth, risk mitigation and compliance efforts while being mindful of the various market and societal forces.

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      Marco forces amplifying ESG – Multiple market and societal forces have heightened the importance of ESG

      The fight for Racial Equity and Social Justice – Working to achieve racial diversity, equity and inclusion is a renewed priority for companies looking to drive sustainability and overall performance.

      Talent and customer attraction – Employees and customers are demanding organizations to stand for something beyond profit.

      Sustainable investing from niche to mass market – Sustainable investing continues to expand into a major market segment, fueled by firms like BlackRock demanding corporate disclosure.

      Biden Administration’s Bold Climate Change Agenda and SEC changes – The Biden administration has to bold climate agenda, and is focused on building a modern, sustainable infrastructure and clean energy future.

      Shift to stakeholder capitalism – Stakeholder’s demands are forcing executive and decision-makers to rethink their organizations’ goals beyond maximizing shareholder value.

      Rising global threats and associated opportunities from climate change – The seriousness and scale of the risks posed by climate change highlight the need to accelerate change through business innovation.

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      Key stakeholders within the real estate industry:
      Tenants and their customers, Board of directors, Communities, Employees, Lenders, Government, Investors, Shareholders, Suppliers.

    Mark Grinis, EY Americas Real Estate, Hospitality & Construction Leader; and Brad Greiwe, Cofounder and Managing Partner of Fifth Wall Ventures; discuss the importance of real estate landlords and their tenants working together on ESG issues, such as carbon reduction.

    Kris Pederson, Leader, EY Center for Board Matters and Kyle Bolden, US-East Region Real Estate, Hospitality and Construction Leader, discuss the millennial effect on ESG.

    The 2021 EY Global Institutional Investor Survey found that investors are seeking financially material ESG data from companies.

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      90% investors surveyed said that, since the COVID-19 pandemic, they attach greater importance to corporates’ performance when it comes to their investment strategy and decision-making.

      80% investors surveyed said that a corporate having a strong ESG program and performance would have a significant and direct impact on analyst recommendations today.

  • 2. What ESG issues are most material and require prioritized strategic investments by your real estate organization?

    Conducting a foundational analysis will help identify ESG issues important to your internal and external stakeholders and reveal the most material issues to pursue.

    Sample real estate company mapping and prioritization of key stakeholder issues are shown below. What are your organization’s most material issues?

    Sample real estate
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      The figure above is a 4-quadrant graph with X axis as 'Importance to the business' and Y axis as 'Importance to the stakeholders':

      Quadrant 1 includes Safety and security, Talent growth and retention, Employee engagement, Tenant engagement, Risk management, Government relations.

      Quadrant 2 includes Climate and energy usage, Health and wellbeing, Diversity, equity and inclusion, Gentrification and affordable housing, Corporate governance.

      Quadrant 3 includes Data privacy, Water conservation, Biodiversity, Pollution reduction.

      Quadrant 4 includes Transportation and traffic reduction, Waste reduction, Community engagement, Labor conditions, Human rights, Local economic impact.

    Robyn Bew, US-West Region Leader, EY Center for Board Matters; and Nit Reeder, EY Entrepreneurs Access Network Leader; discuss board-related views on diversity, equity and inclusion.

    Mark Grinis, EY Americas Real Estate, Hospitality & Construction Leader; and Brad Greiwe, Cofounder and Managing Partner of Fifth Wall Ventures; discuss the importance of private real estate organizations’ involvement in climate action.

    Consider ESG disclosure guidance from entities such as the ones below to help identify appropriate metrics for your material issues

    There are many standard setters and organizations who aim to drive ESG reporting via standard setting and various other frameworks. The below highlights a few of these organizations.

    Standard setters: GRI and SASB

    • Global Reporting Initiative (GRI). The first and most widely adopted global standards for sustainability reporting.
    • Sustainability Accounting Standards Board (SASB) (since 2011). Sustainability accounting standards help companies disclose material, decision-relevant information to investors in a cost-effective way. There are industry-specific standards for 77 industries in 11 sectors.

    International goals and guidance: UN SDGs and TCFD

    • Sustainable Development Goals (SDGs). There are 17 goals supported by 169 targets developed by the United Nations.
    • Task Force on Climate-related Financial Disclosures (TCFD). TCFD was established by the Financial Stability Board (FSB) in 2015 to promote more effective climate-related disclosures; it is focused on financial impacts of climate-related risks and opportunities of an organization.

    Disclosure-based sustainability scores: Dow Jones Sustainability Index and CDP

    • Dow Jones Sustainability Index (DJSI) represents the top 10% of the largest 2,500 companies (-300 companies); scores are developed from S&P Global’s Annual Corporate Sustainability Assessment (CSA).
    • CDP (Formerly Carbon Disclosure Project) requests companies, cities, states and regions to provide data on their environmental performance though five questionnaires.
  • 3. Has your real estate organization established measurable ESG performance outcomes?

    The ability to track and measure your organization’s ongoing ESG performance, with the help of accurate and accessible data, is critical to enabling continuous improvement efforts that can be reported to your stakeholders.

    Sample ESG goals and metrics are shown below. What are your organization’s long-term ESG goals and targets, and how will you measure success?

    Original goals

    Performance against goals in 2021

    Current goals

    Carbon reduction

    Achieve net-zero carbon across all operations by 2030.

    On track:

    • [Details on 2021 achievements]
    • Achieve net-zero carbon across all operations by 2030.

    Energy efficiency

    Reduce energy consumption by 20% by 2030, from a 2020 baseline.

    On track:

    • [Details on 2021 achievements]
    • Reduce energy consumption by 20% by 2030, from a 2020 baseline.

    Water consumption

    Reduce water consumption by 10% by 2030, from a 2020 baseline.

    On track:

    • [Details on 2021 achievements]
    • Reduce water consumption by 10% by 2030, from a 2020 baseline.

    LEED

    Obtain LEED Gold certification or better for 100% of all new developments.

    Achieved:

    • [Details on achievement of original goal]

     

    • Continue to obtain LEED certification for 100% of new developments (LEED Gold or higher).
    • Achieve LEED certification at 80% of the in-service office portfolio by 2026.

    Healthy buildings

    Obtain WELL certification for 75% of the portfolio by 2030.

    On track:

    • [Details on 2021 achievements]

     

    • Obtain WELL certification for 75% of the portfolio by 2030.

    Diversity

    • Add one female director to the board by the end of 2022.
    • Have 100% of employees complete DEI training by the end of 2021.

    Achieved:

    • [Details on achievement of original goal]

     

    • Increase the use of a diverse set of contractors by 20% by 2026.

     

    Brad Greiwe, Cofounder and Managing Partner of Fifth Wall Ventures; and Dean Richards, Head of Digital Technology at Carrier Residential; discuss the importance of data in real estate and ESG-related initiatives.

    As stakeholder pressures and ESG-related regulations grow around the globe, a similar increase is likely in the number of organizations receiving independent third-party assurances to gain stakeholder trust and confidence on their tracking, measurement and reporting of ESG efforts.

    Assurance in the US continues to increase in response to stakeholder pressures

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      Assurance in the US continues to increase in response to stakeholder pressures

      29% - Current state of US ESG Assurance:

      Only 29% of S&P 500 companies publishing an ESG report received external assurance. 90% of S&P 500 companies publish ESG report.

      82% - Indications of the future of ESG Assurance:

      Globally: 82% of members of a global member-based organization, the World Business Council for Sustainable Development, received external assurance on their ESG.

      67% - Indications of the future of ESG Assurance:

      Globally: 67% of investors believe ESG reports should undergo full audit, similar to financial audit.

    REIT disclosures tied to environmental performance and social policies have consistently increased each year for the last three years.

    Among REIT reporters:  

    • The majority offer environmental performance metrics.
    • Most reference GRI or SASB standards.
    • Greater emphasis has been placed on social disclosures.

    REIT assets with environmental performance disclosure

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      Carbon emissions disclosure:

      2017 – 38%

      2018 – 41%

      2019 – 51%

      2020 – 66%

      Energy usage disclosure:

      2017 – 33%

      2018 – 42%

      2019 – 51%

      2020 – 66%

      Water usage disclosure:

      2017 – 30%

      2018 – 35%

      2019 – 47%

      2020 – 58%

      Waste management disclosure:

      2017 – 27%

      2018 – 32%

      2019 – 39%

      2020 – 43%

    Additional reporting trends:

    • 65% of S&P 500 reporters responded to the CDP climate change questionnaire in 2019.
    • 69% of Fortune 100 companies in 2019 offered sustainability commitment information in the proxy.

    REIT disclosures of social policies

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      REIT disclosures of social policies

      Supplier screening:

      2018 – 22%

      2019 – 58%

      2020 – 69%

      Diversity and equity:

      2018 – 49%

      2019 – 62%

      2020 – 89%

      Health and safety:

      2018 – 49%

      2019 – 64%

      2020 – 73%

      Sources: “Trends on the sustainability reporting practices of S&P 500 index companies.” Governance & Accountability Institute, Inc. (2020), State of Sustainability and Integrated Reporting, 2018 Investor Responsibility Research Center Institute (IRRCI), NAREIT.

  • 4. Does your real estate organization have an appropriate governance structure in place to pursue ESG goals and targets?

    Activating your ESG plan requires a cross-functional workforce that supports your executive leaders and helps deliver your desired outcomes.

    Embed ESG as part of all your real estate organization's board committees to enhance cross-functional effectiveness and innovation

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      Embed ESG as part of all your real estate organization's board committees to enhance cross-functional effectiveness and innovation:

      Corporate responsibility and sustainability committee

      Finance committee

      Executive committee

      Strategy and planning committee

      Compliance committee

      Risk committee

      Technology committee

      Public policy committee

      R&D committee

      Nominating and governance committee

  • 5. Does your real estate organization understand how you are perceived in the marketplace?

    Voluntary disclosures are only one of the multiple sources that rating agencies and similar entities use when reporting on a real estate organization’s ESG efforts. These outside ESG data sources and rating agencies will only grow over time. Understanding how your organization is perceived and rated across these multiple entities is a first step toward establishing an ESG narrative about your organization that is accurate and perceived in a positive light by your stakeholders.

    Consider the growing number of third parties that are reporting on and rating your company’s ESG efforts. How can your organization’s ESG innovation efforts also help you improve the way third parties view your ESG performance in comparison to your competitors?

    Sample ratings agencies Description

    MSCI

    MSCI (formerly Morgan Stanley Capital International) looks at data on 37 key ESG issues and collects data from publicly available sources to provide ratings for over 6,000 companies and 400,000 equity and fixed income securities.

    Sustainalytics

    Sustainalytics covers 60-80 issues in each industry and looks at four dimensions: Preparedness, Disclosure, Quantitative Performance and Qualitative Performance.

    Spotlight on the EY ESG IQ solution

    Improving ESG rating agency scores can be complex, confusing and time-consuming. The EY ESG IQ solution transforms disparate rating agency data on your company into a powerful analysis tool, enabling a quantitative approach to identifying viable ESG rating agency improvement opportunities.

    Benefits and capabilities of ESG IQ

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      Benefits and capabilities of ESG IQ

      Easily compare performance across ESG rating agencies and understand how your company-specific ESG goals, activities and reporting will affect scores.

      Understand what activities will drive outsized score improvements across multiple rating agencies and quantitatively inform a strategic score improvement roadmap.

      Benchmark rating agency performance to peers.

      Confidently communicate current and target rating agency performance to leadership.

Summary

Leading real estate companies are taking a more strategic and holistic approach to environmental, social and governance issues and view it as a business imperative to drive long-term value for all stakeholders.

About this article

Authors
Kyle Bolden

EY US-East Region Market Segment Leader – Real Estate, Hospitality and Construction Sector

Trusted advisor to high-growth companies that are transforming the real estate industry through innovation.

Christopher M. Johnston

Americas REIT Leader and US West Region Assurance Leader – Real Estate, Hospitality & Construction

Helping large global institutional investors, public REITs, emerging growth companies and entrepreneurs seek capital to create enterprise value.

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