Improving the benchmarking of ESG in real estate investment

‘Environmental, social, & governance’ (ESG) standards have taken on increased importance in real estate investment in recent years, with benchmarking ESG being critically important for more informed real estate investment decision-making.

Using stakeholder interviews with senior real estate executives, the paper Improving the benchmarking of ESG in real estate investment examines the strategic issues regarding benchmarking ESG in real estate investment; specifically, identifying areas where ESG benchmarks need to be improved. Issues of granularity, climate resilience and climate risk, an increased focus on outcomes and performance, and using best practice procedures in delivering ESG in real estate investment are covered.

In total, 60 stakeholder interviews were conducted with key real estate players to assess the use of ESG benchmarking in real estate investment at various levels (asset/fund-level, listed real estate, delivery, reporting and internal benchmarking), across regions, and across different types of real estate investment players (real estate fund manager, real estate investment trust (REIT), institutional investor and real estate advisor).

There was clear evidence of the need for improved benchmarks for ESG in real estate investment. More focus is needed on performance, outcomes, and impacts, with a stronger focus on granularity around the issues of climate resilience and climate risk. Improvements in Global Real Estate Sustainability Benchmark (GRESB), as well as increased attention to Task Force for Climate-Related Financial Disclosures (TCFD) were seen as important initiatives. Clear differences were also seen in the use of ESG benchmarks on a regional basis, with Australia and Europe seen as the world leaders. These strategic stakeholder insights have led to the development of best practice guidelines for more effective delivery of ESG benchmarks to inform real estate investment decision-making, and also recommendations for improving ESG benchmarking in real estate investment. These issues have a clear impact on ongoing capital raisings by investors, where benchmarking ESG is an increasingly important factor for real estate investors, tenants, and real estate asset managers.

Based on the stakeholder interview responses, this paper identifies key areas for improvement in the current benchmarks for ESG in real estate investment. It is anticipated that an increased focus on technology and the availability of more granular data, coupled with user demand, will see more focus on assessing performance, outcomes and impacts at a real estate asset-specific level, and produce a fuller range of ESG metrics that are more focused on climate resilience and climate risk. This will see a more effective range of ESG benchmarks for more informed real estate investment decision-making.

The accepted version of Improving the benchmarking of ESG in real estate investment is available for download at City Research Online. It is published in Journal of Property Investment and Finance. The paper has been co-authored by Alex Moss, Director of the Real Estate Research Centre at Bayes Business School.