U.S. Advisors, REITs Embrace New Global Benchmark
By Brad Berton, Contributing Writer
Involvement with an international organization is providing a growing roster of public and private American real estate investment managers with access to increasingly detailed sustainability scorecards. And perhaps even more important, it is helping their investors and tenants, too.
The Amsterdam-based upstart worldwide commercial property sustainability and corporate responsibility endeavor dubbed the Global Real Estate Sustainability Benchmark offers an annual benchmarking survey that aims to calculate how institutional portfolios?and the investment companies that manage them?stack up in terms of environmental, social and governance practices, known in shorthand as ESG. In addition to energy efficiency, GRESB endeavors to benchmark water frugality as well as waste collection and recycling related activities?and even corporate cultural factors such as sustainability training programs and vendor incentives.
If the 2012 version is any indication, participation by American real estate advisors and publicly traded investment trusts is expanding pretty dramatically, thanks at least in part to the GRESB?s newly forged partnerships with the National Association of Real Estate Investment Trusts and the Pension Real Estate Association. While the GRESB brain trust hopes more American pension plans will join their European and Canadian counterparts among the 35 or so core investors that are members, interest among companies that manage their capital is burgeoning impressively.
To wit, participation in the Americas (one of the GRESB?s four global regions) rose from fewer than 65 companies in 2011 to more than 100 with the latest survey?with collective assets under management exceeding a half-trillion dollars. The ranks of North American REITs alone more than doubled to over 30 trusts. (It didn?t hurt that NAREIT modified the judging criteria of its latest Leaders in the Light energy efficiency awards to incorporate GRESB survey results.)
As GRESB co-founder & executive director Nils Kok explained, benchmarking managers? sustainability-related performances and practices unleashed competitive forces incentivizing greater green-minded efforts. ?GRESB?s collaborative top-down approach to creating transparency ? should lead to some healthy competition among REITs and investment managers.?
A critical longer-term expectation is that as data and analysis become more sophisticated and comprehensive over time, the GRESB will also help prove currently theoretical correlations between sustainability and financial performance, Kok added. Quite a meaningful endeavor indeed for institutional investors as well as their real estate consultants and related decision-makers such as REIT mutual fund managers and fund-of-funds sponsors.
?Ultimately, if managers are not coping with changing times (sustainability-wise), it will be reflected in their returns,? predicted Eric Lang, managing director of real assets with the Teacher Retirement System of Texas (TRS), the GRESB?s sole U.S. pension plan member.
Kok appreciates today?s transparency-promoting voluntary sustainability labeling efforts and benchmarking mandates?and that an increasing number of REITs and investment managers highlight energy efficiency and other performance measurements in annual reports. Nevertheless, he says the kind of information available to investors today is simply too fragmented to permit proper due diligence comparisons.
Achieving Transparency
Enter, the GRESB, as its ever-more-detailed benchmarking and reporting aims for increasingly meaningful levels of transparency with each survey. The first step is for managers to be able to disclose to investors environmental and social performance details in a common format, allowing for useful peer-to-peer comparisons.
Then, as disclosure becomes the standard and GRESB participants strive to improve their benchmark positions, capital sources will be in a better position to base investment decisions on transparent performance records. ?But that?s still one step away for most investors,? Kok acknowledged.
Still, it?s a sound theory driving more domestic GRESB participation and helping push sustainable practices and initiatives among investment managers, agreed Joe Lopez, the Equity One Inc. shopping center REIT?s director of environmental impact.
?As more companies respond to reporting standards and benchmarking, we believe it raises the bar for all operators, which is a good thing,? Lopez related in the wake of his company?s Leader in the Light win in the small-cap retail category. ?Transparency will be the key for investors and other stakeholders to identify leaders and laggards in the industry.?
Equity One, which has been exceptionally proactive with sustainability initiatives in recent years, participated in the GRESB survey for the first time in 2012. While participation alone has not generated new initiatives or policies, ?we found GRESB to be a useful tool to measure where we stand in the marketplace compared to our peers,? Lopez said.
Clearly, a lot of operators in the Americas as well as Europe, Asia and Australia share that sentiment. Nearly 450 firms around the globe participated in the latest GRESB survey, up some 30 percent over the 2011 effort and boosting combined real estate assets under management to roughly $1.3 trillion. The North American institutional contingent, however, remains far more Canadian than American.
TRS is not specifically incorporating GRESB performance figures into its real estate manager evaluations, according to Lang. ?But we find it valuable as a tool to let our managers know we are watching. And over time it should be a good measure indicating how each of them is reacting to the changing view on property design, energy consumption (and related matters).?
U.S. institutions are slowly coming to realize that ESG performance?and particularly energy efficiency?contributes to bottom lines and reduces downside risks, Kok stressed. Indeed, research in which he has participated indicates REITs boasting demonstrably more energy-efficient and otherwise sustainable portfolios can generally expect higher risk-adjusted returns, as they appear to be less exposed to business cycle volatility and occupancy risks.
?So I expect to see more U.S. investors using data like that provided by GRESB in the near future.?
Meanwhile, as the 2012 GRESB survey reveals, REITs and other investment managers continue making considerable progress in greening portfolios and operations. As Kok noted, three of every five respondents now collect and report energy consumption data (compared to one in three in 2011), and more and more are designating staffers with specific responsibilities for implementing increasingly detailed sustainability policies.
This greater management attention pushes progress beyond the proverbial low-hanging fruit (such as lighting upgrades) toward more ambitious ongoing efforts including ever-smarter buildings more intimately engaged with tenants and even energy grids, Kok added. Among the tweaks incorporated into the 2012 GRESB survey are credits for a variety of tenant engagement activities.
Peer achievement also helps win buy-in. In this year?s survey as well as the 2011 version, the GRESB designated Bentall Kennedy as the Americas leader among investment managers with diverse portfolios not dominated by one income-property category. Likewise taking home regional honors by property type in 2012 were Thomas Properties Group (office), Simon Property (retail), Prologis (industrial), Clarion Partners (multifamily fund) and HCP Inc. (specialty).
This recognition offers an influential validation of policies and practices among existing and prospective investor clients, stressed Nada Sutic, sustainability director with Bentall Kennedy. ?It?s one thing for them to hear it from us. But when they can see the transparency of such a third-party benchmarking operation, it?s quite the credible endorsement.?
Going forward, she shares Kok?s expectation that the GRESB?s eventual ability to correlate sustainability with profitability will prove to be the ultimate motivator for investors. And things are moving in that direction, as ongoing documentation is making it increasingly clear that sustainable practices and materials do in fact reduce overall operating costs and boost user demand for space.
While definitive cause-and-effect documentation remains elusive given so many demand-driven variables, Sutic noted, ?we have been able to confirm that rents have recovered more quickly at the greener properties, and that tenant loyalty is proving to be stronger.?
The Equity One brain trust likewise is well aware that sustainable practices help the bottom line?and also views them as a critical component of corporate responsibility that helps support communities and the environment, added Lopez.
And it is clear that investors and tenants are taking notice, he continued. ?Both the investment communities and our tenants are beginning to see the benefits of responsible and sustainable operations.?
Source: http://www.cpexecutive.com/in-print/green-measures/
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