The health of our environment, sustainable conditions for our communities, social and economic equity, and reliable government policies are essential to growth and business prosperity. Yet, stacks of well-meaning books and hours of informed dialogue are not enough to assist in the unblinking world of large investment firms, whether hedge funds, banks, REITs, or fiduciary protectors of pensions. On a recent episode of The Decarbonization Race podcast, advisory group GRESB shared how they’re working to help investors, by adding transparency for institutional investors and advisors, helping them do their fiduciary duty with high-quality data on real estate and infrastructure.
Investors’ Need for Strong, Accurate Data
For investors to do their due diligence, accurate data is critical – assembled from a myriad range of sources, collated and made meaningful by a scoring system with strong methodology. Yet hard data and defensible theoretical theories that unify these disparate elements of society are hard, if not impossible, to find.
Imagine the early days of fifteenth-century navigation. Map-making was secretive, a matter of national security. Theories of longitude and latitude were expressed but not universal. Seafarers lacked accurate timepieces and the sextant was primitive. The art of navigation was left to intrepid captains willing to risk life and reputation for their confidence and experience.
So, too, today ESG navigation lacks universality in language and theory. What is emerging in firms like GRESB is a quest to provide a strong foundation of data with a similar strong methodology on which hugely important investment decisions can be made rationally.
How GRESB is Changing the Planet
Dan Winters, Senior Director, Market Development & Strategic Initiatives at GRESB, is helping shape and promote GRESB’s data framework every day. He understands that the language of this enterprise is solidifying and that the theoretical work is still in its incumbency. Trial and error is still contributing to the basic progress in field management decisions.
Institutional investors seeking to improve the sustainability performance of their investment portfolios are using the GRESB Benchmark to engage with private equity fund managers. Those with enormous responsibilities ‘to get it right’ and defend their inputs to skeptics must use best available knowledge. That’s the fundamental premise of GRESB as a consultant and certified expert in compiling ESG data for investment decisions.
One only needs to survey recent ESG events to understand the urgency of the need for useable predictive data. This year, wildfires swept Asia, Europe, and the Americas. Historic droughts have dropped water levels in European rivers so much that transport had to be moved from barges to trucks at immense expense. Multiple heat waves stressed electric power grids. Population movements due to war and other governance policies were enormous in both Europe and parts of the United States. These ESG events had and will have a worldwide impact on investment outlook, commitment and even longevity of assets.
“GRESB is the framework and the language that unites the globe,” says Winters. “Everybody’s in this together. Having a centralized common language is difficult, but we’ve been able to do it.”
“When you’re talking about GRESB, you’re asking questions about fund managers – Blackstone, KKR, Carlisle, AEW. But what we’re really asking about is the fund. How integrated is ESG into the mindset and the management of the fund manager. It’s one lens from which to interpret GRESB. The more integrated from decision-making and a policy standpoint, the more action typically happens down the line.”
“Our governance is really the governance of sustainability,” says Winters. In real estate, the issue is whether the investment decision considers climate change planning, property condition assessments, and phase one environmental. GRESB evaluates inconsistencies because “it’s one thing to have a policy to write down and another thing to live it.”
New Guidelines for Reporting GHG Emissions
The core of decarbonization depends on the precise measuring and tracking of GHG emissions. Companies can’t get an accurate handle on their carbon footprint without a standardized approach. The GHG Protocol Corporate Standard classified three “scopes” covering direct and indirect emissions. Scope 1 and Scope 2 emissions reporting is mandatory for many global corporations as it relates to onsite and purchased energy. However, Scope 3 emissions, which have the largest impact and are challenging to measure, relate to indirect emissions external to the organization – upstream and downstream of the company’s value chain.
The information GRESB provides helps investors make informed decisions on sustainability when trillions are at stake. New Zealand, Japan, Hong Kong, the EU, and the UK are all moving ahead with similar guidelines. Reporting has to be absolute per unit of revenue (greenhouse gases per dollar) and per unit of product. Additionally, companies must disclose how those estimates were derived and which greenhouse gases they cover (methane, nitrous oxide, or CO2), and the source.
Scope 1 and Scope 2 reporting is relatively straightforward, but Scope 3 is challenging to quantify because the boundaries are often vague. Different countries have different interpretations, and some have no regulatory body at all. “Either way,” says Winters, “what regulations do is they prompt people to say, ‘hey, we need systems and a process to do this, and let’s do our level best to elevate and be transparent.’”
Any company seeking to reduce its Scope 3 emissions has to work with its suppliers to understand where emissions come from along the entire value chain. This means gaining data on your supplier’s suppliers and their suppliers and working with every company along the chain to reduce emissions. The key challenge is inertia or lack of urgency at the C-suite level, and the will to publicly report. Another challenge is a lack of sufficient resources or poor data quality. Companies need to invest in high-quality technology tools and analytics to ensure they have strong, auditable data to meet assurance standards.
When thinking about how to reduce Scope 3 emissions, companies should consider the following activities: business travel, employee commuting, waste generation, transportation, and distributions, switching to lower emission fuels and vehicles, designing durable, recyclable products, and manufacturing more energy-efficient products. Tracking progress and measuring emissions is a critical next step after taking action. While large changes may be impossible to make, even small changes make a big impact.
For Lincoln’s full conversation with Dan Winters, listen to the episode on The Decarbonization Race podcast.