What are ESG benchmarks and why do we need them?
ESG benchmarks have become fundamental in today’s corporate landscape where sustainability has become a high priority for every sector. Within the real estate sector, ESG benchmarks are becoming increasingly common, both in the number of companies participating in them and the number of ESG benchmarks that are available. This uptake is driven by legislation, as well as socially conscious investors and clients, who are using these benchmarks to try and make better, and more environmentally driven decisions, with more than 95% of investors now using ESG data in their decision-making External Link.
With benchmarks becoming increasingly prominent, it’s essential to understand what exactly they are and why they’re becoming an integral part of the decision-making process for organisations. First and foremost ESG benchmarks allow organisations to evaluate their ESG performance against other entities. The main goal is to better understand an organisation’s performance by capturing and quantifying ESG attributes, so that new sustainable measures can be implemented. This data also allows companies to identify any shortcomings they have within their portfolio or organisation, further allowing them to develop new goals and strategies, if needed, allowing them to improve their competitiveness.
The Impact of ESG Benchmarks in Building Lifecycles
Over the course of a building’s lifecycle, occupancy costs can total more than four times the original design and construction costs, specifically utility costs, which account for the second highest cost after rent. On average, it is estimated that occupying a building costs 92% of the total lifecycle cost of a building External Link. Thus, improved energy performance across a portfolio can have a significant impact. By identifying and measuring the relevant key performance indicators (KPIs), which vary across different benchmarks, companies can collect the required data to benchmark their portfolio performance both internally and against the wider commercial real estate sector. But most importantly, these benchmarks can highlight how buildings or organisations can become more sustainable, the overarching goal of all sustainability frameworks.
Top Benchmarks in the industry
There are numerous ESG benchmarks within the industry, with some specific to the UK, for example, FTSE UK 100 ESG Select Index External Link, which organisations can combine with frameworks to support their benchmarking objectives. Examples of such frameworks include PRI External Link, CDP External Link and TCFD External Link, which play a similar role to ESG benchmarks, but focus more on providing a template for organisations to follow in achieving their ESG goals.
Some of most widely used ESG benchmarking tools in the UK real estate industry can be seen below, with a brief exploration of what these benchmarks measure and how.
The most prominent benchmark used globally is GRESB (Global Real Estate Sustainability Benchmark), which currently has data covering US$6.5 trillion in real estate and infrastructure value and is used by more than 1,820 entities worldwide External Link Under the GRESB Real Estate Assessment pathway, GRESB has two benchmarks: the real estate standing investments benchmark and the real estate development benchmark. These benchmarks are aligned with globally recognised standards including GRI External Link, PRI External Link and TCFD External Link recommendations, the Paris Climate Agreement and country specific disclosure guidelines and regulations.
Specifically, the GRESB assessment evaluates an organisation’s performance against three potential ESG modules: Management, Performance and Development. Each indicator within the modules has a specific number of points assigned to it, the total number attainable being 100, with the average benchmark score being 77. Organisations will also be given a GRESB rating, whereby if an entity is placed within the top quintile, it will receive a GRESB 5 Star rated entity. Conversely, if it ranks within the bottom quintile, it will receive a GRESB 1 Star rated entity.The MSCI ESG Ratings currently rates over 8,500 companies, using corporate disclosure alongside alternative data including media, academic material, and government sources to further supplement the supplied data External Link. Overall, the aim of MSCI is to measure a company’s management of financially relevant ESG risks and opportunities. Using standardised public data, MSCI use a standardised methodology to assess a company’s risk exposure and risk management. Then, using a rules-based methodology, ESG ratings are provided, ranging from leader (AAA,AA), average (A,BBB,BB) to laggard (B,CCC).
Dow Jones Sustainability Indices External Link, for company’s internal process and external communication. The CSA covers 61 different industries, whilst the CSA methodology has approximately 100 questions for each industry, all of which fall under one of the approximate 23 themes and criteria. The CSA then generates a total score, out of 100, for each company. More than half of the 1000+ participating companies of their 2022 Feedback Survey recently stated that increased visibility with sustainability-focused investors was their main reason for participating in the CSA External Link.
Current barriers & next steps for ESG benchmarksESG benchmarks, whilst still evolving, help to provide essential metrics for all stakeholders involved. Despite this, there have been an increasing number of growing concerns in recent years, exacerbated by the rising number of emerging benchmarks. This growing number of benchmarks combined with an ever-increasing volume of data being generated, provides a catalyst for a new generation of ESG benchmarks in real estate investment. The World Business Council for Sustainable Development (WBCSD) state that there are more than 4,500 individual ESG reporting indicators which are used by over 600 benchmarks and commitments External Link. With so many reporting frameworks and benchmarks the ability to assess and compare ESG performance can become very difficult, especially when companies decide themselves which standards they wish to report against. It is not possible for every company to actively participate in every benchmark, instead it is likely a favoured benchmark, potentially new or existing, will need to be established by the industry.
In addition to the growing number of benchmarks, the price of these frameworks can also be prohibitive, with a survey by ERM determining that companies spend on average between US$220,000 and US$480,000 on rating related costs per year External Link. Due to this, governments and reporting organisations are aiming to standardise what, where and how companies report ESG data, to make it easier and more accessible External Link. In theory, the solution could easily be solved by creating a singular universal ESG reporting framework. Current movements in the industry are signalling that there could be the eventual formation of a combined universal ESG reporting standard. This is evidenced by five global framework and standard setting institutions (CDP External Link, CDSB External Link, GRI External Link, IIRC External Link, SASB External Link) publishing a shared vision of the necessary elements for a more inclusive reporting tool External Link. Their vision includes both financial and sustainability disclosures which they would aim to connect via integrated reporting. This commitment to achieve a comprehensive reporting system is supported and most importantly required in today’s corporate landscape where sustainability requirements will continue to grow.