During the past decade, GRESB has worked closely with institutional investors to create a global benchmark for the environmental, social, and government performance of real assets. This long-term effort has been rooted in the belief that information should be aggregated to the level of an investable entity — a company, fund, JV, or similar vehicle that is the subject of decision making for investors.
Consequently, the investable entity serves as the functional unit for investment. It contains governance and management and is the unit upon which profit, loss, and value are ultimately assigned. It follows that investable entities are more than the sum of their parts. As organizations, investable entities bring together physical assets (spaces, buildings, etc.), human capital, technical capabilities, values, strategy, and more.
Past: Barriers to Tracking and Communicating Asset-level Performance
The performance of individual assets – spaces, buildings, infrastructure – has always been a critical part of this value proposition. Yet, in many circumstances, there have been practical and philosophical barriers to greater focus on asset-level performance. Philosophically, some firms believe that investors do not need to know the details of asset performance. That it is the job of the management team to turn capital into returns through investment in property. Investors need to know how the management team approaches this work; however, the condition and performance of any individual asset was sometimes claimed to be immaterial for investors. In other words, the ESG performance of any single asset does not have a significant impact on the whole organization, consequently there is no need to provide any asset-level information. Organizations with this philosophical perspective are often reluctant to provide asset-level information.
Alternatively, some companies concerns are practical and logistical. It has historically been difficult to collect and organize timely and accurate information about environmental and social performance across large, diverse portfolios. Consequently, firms may believe that the evaluation of incomplete, old, or unrepresentative information may again be non-material and unnecessary.
Ultimately, both these perspectives lead to a reluctance or inability to expand assessment and reporting about asset-level performance in real asset ESG reporting.
Future: Evolution toward Asset-level Assessment and Reporting
These concerns are legitimate, but times and circumstances are changing. These long-standing perspectives are being challenged by shifts in expectations, technology, and prevailing practice. The net result is a significant shift in the nature of ESG reporting for real assets. Moving forward, we will see a more balanced treatment of reporting about entity-level goals and business strategies, along with more rigorous and complete information about asset-level performance. Ultimately, this change will be driven by investor demand for information, new technology that makes it easier to collect and analyze large amounts of high-quality, near real time data, and pressure from peers to make relevant asset-level information available and comparable.
This evolutionary change in real asset ESG reporting has three key features: transparency, confidence, and consistency.
Transparency. Stakeholders want more and better information about their investments. Compared to a decade ago, expectations for the transparency of investor-owned companies have increased dramatically. It is no long tenable to simply trust a management team to turn investor cash into returns. There is a greater expectation that investors and other stakeholders can connect organizational values and business strategies to measurable, asset-level outcomes. This expectation is a result of too frequent experiences when disconnections or inconsistencies contributed to risks to financial performance or reputation.
Confidence. The belief in environmental, social, and governance performance leads directly to increasing awareness about the importance of data quality. If ESG performance matters, then stakeholders must have confidence that key metrics are accurate, timely, and relevant. GRESB has long-standing processes to evaluate the relevance of individual metrics, including the regional Benchmark Committees and Advisory Board. Consequently, these metrics are subject to continuous review and discussion. We have begun to see a focus on the accuracy and timeliness of information provided for each metric has lagged behind, witnessed by the GRESB Data Quality Working Group. As part of this work, it is important for organizations to establish a clear chain of custody between points of measurement (e.g., meters) and their aggregated entity-level reporting. Breaks or opacity in this chain create doubt, uncertainty, and the potential for error. Leading companies will increasingly be expected to have robust, end-to-end systems to collect, manage, analyze, and communicate key performance indicators from across the enterprise.
Outcomes. Advances in the management of asset-level data are necessary but not sufficient. Companies will be asked to use this new information to understand and clearly communicate environmental, social, and governance outcomes. This shift explicitly asks companies to go beyond statements of goals, intentions, and actions. Companies are asked to share real world, operational performance, which can provide insight into average or overall performance. However, analysts increasingly appreciate the importance of inter-asset variance and variability as a source of risks and opportunity. For example, many portfolios exhibit so-called “long tail” risks associated with disproportionate exposures for a relatively small faction of assets. The value of asset data extends beyond risk assessment, as high performing assets provide insights into potential and possibility. Information about both risks and opportunities is usually lost in aggregation, and it is time to begin putting this information to work.
Together, transparency, confidence, and outcomes, help motivate and drive the evolution of real asset ESG reporting. The result will be a shift in the balance between entity and asset-level information. This is not a wholesale replacement. Entity-level information is still critical. Analysts must understand entity-level intentions, strategies, leadership, and ultimately financial performance.
Moving forward, we will see rising expectations to understand and communicate asset-level performance to support entity-level ESG benchmarking and reporting. Fundamentally, this is not new, but the implications for management and communications are profound and far-reaching. Firms will be asked to explicitly and demonstrably link high-level goals with on-the-ground outcomes. It will create more risk for low-performing entities and more awareness of low-performing assets within portfolios.
Arc Skoru Inc. (Arc) recognizes the importance and challenge of this transition. Arc is part of the GBCI family of organizations, which includes the U.S. Green Building Council and GRESB. Arc is based in Washington, DC. and led by a team of passionate professionals dedicated to a performance-based approach to green building practice. As a new GRESB Global Partner the Arc team is committed to helping GRESB and its global community of investors and property companies create and operate better spaces, buildings, and places using performance-based tools. The team is committed to making it faster and easier to understand and manage sustainability for individual projects and large, complex property portfolios.
Learn more about Arc’s tools for GRESB on ArcSkoru.com.
Written by Chris Pyke, Ph.D., Senior Vice President, Product, ArcSkoru, Inc.
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