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Libby Toudouze | Sep 06, 2022
For fund shops, regardless of what asset class they cater to, not a day goes by without a mention of environmental, social or governance (ESG). The real estate sector in particular has highlighted ESG as a top concern, especially given recent interest from the Securities and Exchange Commission (SEC) surrounding climate disclosures, as well as the variety of ESG reporting proposals on the horizon.
While ESG is difficult to pin down, particularly from a US regulatory and compliance standpoint across different types of funds, real estate is arguably one of the more difficult verticals on the list. From social considerations such as mental wellbeing of tenants in an office space to downstream manufacturing reporting of building materials, the real estate sector is facing major hurdles when it comes to ESG implementation and proper reporting.
Related: IAA Fears SEC’s ESG Rules Could Lead to Client Confusion
Why real estate struggles with ESG
It’s important to understand why ESG is such a foundational aspect of the investment management sector. While the SEC and other regulatory bodies are still struggling to put specific ESG regulations and rules into place, investors of all shapes and sizes are increasingly demanding more transparency into the environmental, social and governance policies of the companies they invest both with and in. This has driven demand for businesses to rigorously evaluate their ability to report out ESG compliance practices, but the lack of standardized frameworks has left investment managers to find their own solutions and identify what data these investors are truly looking for.
Related: Thiel-Backed Firm Debuts Anti-ESG ETF to Urge More Drilling
A major challenge is the fact that there are many factors that investors may look at when it comes to ESG. For environmental standards, greenhouse gas and carbon emissions are a top area of dissection. However, there are many other factors that can and should be considered when it comes to ESG in real estate. Social concerns, such as building safety and quality are top priorities but even small things such as energy saving light bulbs have to be considered. Real estate is a unique vertical across investment management that requires an incredibly wide view, from the buildings themselves to the pipeline of the materials that were used in the building and the way that building is maintained. All of these factors create a hefty checklist for ESG compliance and are part of the reason why real estate investment companies are struggling to keep up with ESG transparency demands from investors.
Putting the “S” and “G” into ESG
Of the ESG categories, environmental factors receive the most interest across sectors. But for real estate in particular, the social and governance aspects of ESG strategy are fairly unique and provide a set of challenges that other industries have yet to face.
Some of the first ESG issues for real estate that may come to mind are greenhouse gas emissions, such as how much energy is used by a building. However, the social aspects of a real estate portfolio are also pressing. This could include questions such as: Is the building safe from a toxicity standpoint, including mold? Are the buildings in working order and safe for inhabitants? There are also questions of mental health – while dimmer lights may mean less power grid usage, what is the impact of low lights on individuals in a working environment if a building is used as an office building?
Likewise, from a governance perspective, there are real estate-specific factors that may be easily overlooked. From an investor standpoint, it’s important to consider evaluations of the executive management, including vetting whether these teams comply with all local regulations. Governance also includes the quality of a building’s management.
When combined, social and governance within real estate outline the community surrounding a building. This brings up the question of whether there is community engagement, how the executive management team works to support the community, and how those factors translate into ESG considerations for investors.
All of these social and governance factors are difficult to report, and without a standardized framework for requirements, it’s up to individual buildings to comply with the needs of their tenants, and for companies to identity what their investors need from ESG reports.
The role of technology in ESG reporting
While there’s no one size fits all solution to the real estate sector’s ESG problems, it’s clear that the sheer volumes of data that need to be captured for ESG record-keeping will only continue to drive the sector’s dependence on technology.
For real estate companies that need to organize their reporting for investors and board members, having a centralized technology platform that monitors, analyzes, and provides reports on ESG metrics is critical. Real estate firms with ESG requirements must take massive volumes of data and distill it into records and reports to outline their ESG policies in practice.
What’s next?
The SEC is in full swing with more climate disclosures and ESG proposals on the horizon, and it’s clear the real estate investment sector must buckle down and implement ways to properly leverage their data to prove ESG policies that meet investors’ needs. While regulators iron out specifics on what information these regulatory reports will require, real estate funds should be beefing up their technology infrastructure and compliance teams to handle the data volumes these reports will require. Changes to specific ESG requirements will surely occur, but the need for technology and data management capabilities has been confirmed.
Libby Toudouze is Managing Director, IQ-EQ. IQ-EQ helps global investors focus on investing and preserving capital in a sustainable and compliant manner.
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