GRESB has been serving real estate equity investors since the benchmark launch in 2009. In 2015, GRESB began applying similar methodology and benchmarking to enable institutional investors to extend ESG integration to their real estate debt investments. The 2015 Debt Assessment produced a base level of industry intelligence, providing engagement opportunities for lenders to develop and implement best practices.
Building on this successful launch, the 2016 Debt Assessment is open to new participant categories including banks, life companies, pension funds and mortgage REITs, in addition to real estate debt funds.
The GRESB Debt Assessment is specifically tailored to the functions and processes of real estate lenders and debt portfolio owners, and is designed to capture sustainability engagement and performance metrics on a worldwide basis. Participant data is used to define peer groups underlying the individualized GRESB Debt Scorecards and Benchmark Reports, and aggregated to inform the business intelligence contained in the GRESB Debt Report.
The GRESB Debt Assessment focuses on five key Aspects of lender and debt portfolio owner activity:
Management - focuses on how the organization addresses ESG implementation in the context of its overall business strategy.
Policy & Disclosure - investigates steps taken by the participant to disclose its ESG performance and to develop and implement sustainability policies.
Due Diligence - focuses on ESG considerations at both the property level and borrower/sponsor level as part of due diligence practice.
Monitoring & EMS - investigates the integration of ESG issues within ongoing portfolio monitoring processes, and captures the sustainability attributes of the existing loan book.
Opportunities - focuses on lender potential to contribute to market transformation.
Better Risk Management Techniques – embedding ESG considerations and industry best practices may improve risk management practices and outcomes related to credit, compliance, reputational and strategic risks.
Integrating sustainability can improve risk management practices and outcomes in four key areas. Click here to find out more.
Managing downside risk is critical to delivering a risk-adjusted return. Sustainability risks can adversely impact collateral value and a borrower's ability to fully repay their obligations.
A 2015 study conducted on nearly 23,000 individual CMBS loans found lower default rates associated with Energy Star labeled [20% lower] and buildings in transit-oriented locations [30% lower]. This study provides another piece to the established body of academic literature [2012, 2016] indicating green buildings have better effective rental rates, superior tenant attraction and retention qualities, and higher resale values compared to their non-green counterparts. Stepping beyond short-term market dynamics, as extreme weather events increasingly impact buildings and tenant and investor preferences evolve, investors face the risk of stranded assets characterized by locational disadvantages, rising operating costs, and accelerating obsolescence that may result in above-market write-offs.
While the academic research may be compelling, it is limited to addressing collateral quality and security. There remains additional ESG risk associated with a sponsor as either borrower or guarantor. Knowing the sustainability track record of a sponsor can provide valuable insight in regard to how efficiently the sponsor is likely to operate and manage the collateral. Underwriting and monitoring this risk is particularly relevant in cases where lenders receive or inherit under-performing assets due to default.
Sustainability data and analysis at both the collateral-level and sponsor-level can serve as competitive edge if properly integrated into loan structuring, underwriting, due diligence and ongoing monitoring. Incorporating these factors into Probability of Default models and Loss Given Default models is a best industry practice. With sustainability risks fully priced, lenders may experience fewer losses during downturns, maintain more consistent lending operations, and provide more stable returns to investors.
Evolving environmental regulations on climate change, energy benchmarking and disclosure laws, and other building-related regulations impact the overall portfolio risk profile.
Although environmental legislation varies across regions, certain themes emerge on energy use and disclosure, water consumption, and waste generation. These business issues impact asset competitiveness and ultimately a borrowers ability to fulfill their debt obligations.
In certain countries, there are direct negative consequences for ignoring the environmental impacts of collateral. As example, the UK maintains the Minimum Energy Performance Standards regulation that makes it unlawful to lease properties with energy ratings below a defined minimum threshold thereby negatively impacting property cash flows and asset value.
Investor accountability is fundamental to any lenders ability to access capital.
The ability to access capital is a lender’s lifeblood. Whether this capital is acquired through the capital markets, via shareholders and/or bondholders, or collected as life insurance premiums, investor accountability is implicit.
In the case of private debt funds, the relationship between lender and investor is even more intimate. Real estate debt funds are dependent upon private equity fundraising and nearly 50% of institutional investors include real estate debt strategies as part of their overall real estate allocation.
Institutional investors of all types typically have long-term investment horizons and are increasingly interested in seeing ESG integration extended beyond their equity investments to debt and fixed income as well. Integrating sustainability into a commercial real estate lending philosophy and processes allows lenders to create a portfolio viewed as higher quality collateral, better positioned against unforeseen risk, and aligned with many investor's values.
The real estate sector contributes one-third of global energy consumption and greenhouse gas emissions. As the financiers for building owners and operators, lenders provide the capital that makes positive [or negative] environmental outcomes a reality.
There remains uncertainty whether lender liability will eventually extend to climate change risks associated with buildings through associated carbon emissions. Market signals are such that becoming the lender of choice to those engaging market transformation through the financing energy efficient upgrades, funding full building rehabs, and backing new green developments can't hurt. Owners of the resultant debt rely on your sound judgment.
Early Adopter Advantages – better understand your current ESG performance in relation to your peers, gain industry context and business intelligence, and identify improvement opportunities.
Respond to Investor Demand - increasingly, institutional investors are engaging with their debt portfolio investment managers and companies engaged in real estate lending by requesting that ESG be integrated into lending practices and portfolio management processes.
Strategic Messaging – position your organization at the forefront of ESG integration in real estate lending and communicate performance metrics to internal and external stakeholders.
Provide Industry Leadership – GRESB convenes technical working groups allowing both members and participants to engage further regarding ESG best practice integration in real estate finance. Working groups provide feedback opportunities regarding the assessment process and content.
April 1: GRESB Debt Assessment opens
- Lenders and portfolio owners are invited to participate in the 2016 GRESB Debt Assessment by registering at www.gresb.com. Participants receive login details by email.
- Support offered to address participant issues related to Debt Assessment completion—Response Checks (The deadline for requesting a response check is June 15).
- Participants are asked to confirm data accuracy before submitting their response .
July 1: Close of GRESB Debt Assessment
All submissions must be received by Friday July 1, 2016. GRESB cannot accept any submissions received after this date.
July 1: Validation process starts
GRESB analyzes all participants’ Debt Assessment submissions. This process continues until early August. If needed, GRESB contacts participants during this time to clarify any outstanding issues with a submission.
September 7: Debt Assessment results release
All participants receive a Scorecard containing the headline results including their overall GRESB score and scores for each Aspect within the GRESB Debt Assessment.
The GRESB Debt Assessment is structured in five unique sustainability Aspects. The weighted scores for each of the five Aspects combined generate the overall GRESB score.
The sum of scores for each question totals a maximum 67 points. The overall GRESB score is expressed as a percentage - from 0 to 100. The maximum score for each Aspect is weighted, with each Aspect element building to result in the overall GRESB score. The overall GRESB score is communicated via two dimensions: Management & Policy (MP) and Implementation & Lender Practices (IL).
- Management & Policy is defined as "the means by which a company or fund deals with or controls its portfolio and its stakeholders and/or a course or principle of action adopted by the company or fund." The maximum score for Management & Policy is 29 points and is expressed as a percentage. The MP dimension represents 43 percent of the overall GRESB Score.
- Implementation & Lender Practices is defined as "the process of executing a decision or plan or of putting a decision or plan into effect and/or the action of measuring something related to the portfolio." The maximum score for Implementation & Lender Practices is 38 points and is expressed as a percentage. The IL dimension represents 57 percent of the overall GRESB Score.
What type of organizations participate in the GRESB Debt Assessment?
Participation is open to primary lenders including the real estate finance units of banks, insurance companies, pension funds, and sovereign wealth funds, as well as portfolio owners including private equity real estate debt funds and mortgage REITs.
In 2016, GRESB expanded the participation parameters to include primary lenders spanning a range of practices from traditional underwriting to alternative strategies from publicly traded companies and private equity funds.
For real estate finance units of larger organizations, GRESB Debt serves as an internal assessment tool capable of strategically directing ESG integration and indicating sustainability engagement and performance relative to peers. For mortgage REITs and private equity real estate funds that identify their primary investment strategy as debt, the assessment serves as an outward-facing benchmark for investor and shareholder reference.
For more information please see GRESB Insights .
Who will see the data that I submit via the GRESB online portal?
Data is submitted to GRESB via an online secure platform. GRESB benchmark scores are not made public. The only entities that may access a participant’s benchmark results are:
- Your own organization;
- GRESB Investor Members that are investors in your fund/organization.
No other third party will see these results. GRESB Investor Members must request access to your benchmark results, allowing participants the control to either accept or deny this request.
My organization has just started addressing sustainability-related issues, while implementation in the lending platform and loan portfolio is limited. Should I participate?
You can indeed participate and use the GRESB Debt Assessment as a starting point to assess where your portfolio stands relative to peers, to understand what action needs to be taken and to stay abreast of industry developments. There is no 'naming and shaming' and individual scores are not communicated to third parties, other than to your investors that are GRESB Investor Members.
Besides, GRESB offers first-time Assessment participants the ability to opt for their first year GRESB Debt Assessment results not to be disclosed to their investors - a 'Grace Period'. This period allows you to familiarize yourself with the GRESB reporting and assessment process, without externally disclosing your results. As a Grace Period participant, you will still be able to use the Scorecard and to purchase a Benchmark Report to identify steps to improve your performance for next year's Assessment.
Is it possible to participate in the Debt Assessment with multiple funds?
It is possible and indeed you should submit a separate Debt Assessment for each portfolio or entity. If you are responsible for submitting the Debt Assessment(s), you must first register as an individual via the GRESB website. Once you have registered, you will be able to add individual debt entities to the online Debt Assessment Portal and complete a GRESB Debt Assessment on behalf of each of those portfolios.