Around the world, tenants’ and investors’ demand for a better look into buildings and portfolios has led to an explosion of acronym-named organizations that assess and contextualize the performance of commercial real estate. The GRESB assessment is one such tool; it helps commercial real estate investors make more informed decisions.
Because GRESB is a benchmark that facilitates communication between portfolio managers and investors, rather than between landlords and potential tenants, like LEED or Energy Star, it’s a little less well-known. In this post, we’ll be taking a broad look at GRESB, who it serves, and how it provides value to the real estate industry.
Founded in 2009, GRESB stands for Global Real Estate Sustainability Benchmark. The organizations is a for-profit and based in the Netherlands. The organization conducts assessments of real estate portfolios based on ESG, which stands for Environmental, Social, and Governance. These three factors are considered the pillars of a business that is committed to sustainability and ethical impact. Increasingly, GRESB is considered essential for portfolios that present themselves as committed to concerns outside of quarterly profit.
The 2017 GRESB Real Estate Assessment is a massive 72 pages long. Questions are both quantitative and qualitative, and break down in fine detail questions about the business practices, risks, opportunities, and performance of buildings in a portfolio. Unlike other benchmarking tools, GRESB does not publicize its rating methodology, but in the end it assigns a score as a percentage out of 100.
Under the environmental pillar of ESG, a business or building’s carbon footprint, reliance on nuclear energy, or use of non-renewable resources are some concerns that might be assessed. GRESB asks questions about energy and water use, certification under other programs like LEED, and energy procurement. Unlike other benchmarking tools, GRESB tends to take the long view by asking questions that relate to future environmental performance. Where other certifications skew toward raw data points, GRESB asks questions like “Does the entity have a senior decision-maker accountable for sustainability?” and “Does the organization have an independent third party review of its sustainability disclosure?”
Social considerations related to ESG often revolve around questions of diversity, human rights, and socio-economic class. Within the GRESB framework, social questions are generally more closely focused on buildings in a portfolio’s impact on the local community. It also includes factors that make buildings pleasant to live and work in, like walkability and livability scores, impact on crime levels, and affordability relative to the local community.
Finally, ESG looks at issues of corporate governance. Questions related to management structure, executive-employee compensation ratios, and employee relations feature in this pillar of ESG. The questions that GRESB asks seek to examine issues that are clear-cut violations, like child labor, forced labor, and bribery, alongside more traditional governance issues like shareholder rights and executive compensation.
GRESB also asks questions about more traditional, business-oriented elements of a building’s performance. Risks and opportunities, data management, utility monitoring, and planned retrofits or new construction are all carefully analyzed.
To run a successful business in benchmarking, you have to be adding value for the stakeholders involved – in this case, that means investors, portfolio managers, and sometimes REITs. With GRESB, there are two sides to the value they provide.
On the one side are moral considerations. There have always been investors who place a value on the ethical impact of their money and invest accordingly. In the 1970s, many investors chose to divest from South Africa in order to press for the end of the apartheid regime, for example. The returns from investing in South Africa weren’t worth the compromise in values that many investors felt they would be making.
Instead of divesting from products that are considered immoral, GRESB tries to nudge the industry toward more moral behavior, and its weight becomes stronger with each investor that chooses GRESB-rated products.
The other side of this coin is stability. ESG factors are tied closely to risk, and buildings that perform better are typically more insulated. A building that monitors and reduces its water consumption is less likely to experience an expensive leak or to be as severely impacted by an increase in water prices, for example.
Building teams that put in the effort to implement the factors that score highly in ESG terms are also signaling that they are more “leaned in,” suggesting that they are more capable of weathering even an unrelated storm. Across a portfolio, the impact of this evidence of a team’s engagement in a building makes a big difference for investors.
“What GRESB does is it gets at who’s implementing best practices and who’s engaged on these issues that, one way or another, always end up back at investment risk,” Winters told Aquicore. “For my money, I want the highest yield at the lowest risk. And to the extent that engagement on these types of issues can help inform who’s more likely to deliver that to me? That’s a winner.”
Over the last eight years, GRESB has evolved from a small European organization to a global force in the way that ethically- and risk-minded investors interact with real estate portfolios. Their focus on the interaction between these groups, as opposed to the more public-facing interactions targeted by competing rating systems, has allowed them to develop a strong reputation in the industry. Winters spoke at length about how economic signaling explains part of the relationship between ESG factors and long-term asset stability. Perhaps it’s fitting, then, to say that GRESB certification is a powerful signal all its own.