A leading expert in ESG discusses the potential to save time, energy, and money by harnessing data.
Living through a pandemic has a way of making folks hyperaware of their surroundings.
How many people are on this bus? Is this sidewalk at least six feet wide? Don't forget your mask!
But even before the COVID-19 crisis, the commercial real estate industry was starting to pay more attention to the operations in and around properties. ESG - environmental, social, and corporate governance - has become a trending topic, with improved data collection giving property owners and managers the ability to refine operations to reduce energy use and expenses.
In a recent episode of the Commercial Investment Real Estate podcast series, just as the COVID-19 pandemic was shutting down the global economy, we spoke with Roxana Isaiu, director of ESG and real estate at GRESB, a leading sustainability benchmark for real estate and infrastructure investments across the globe. She discussed how environmental, social, and corporate governance initiatives differ in Europe and North America. She also outlined how ESG will impact the struggle against the COVID-19 pandemic.
Listen to the full podcast episode.
CIRE: Since so many of our readers are in North America, can you give us a brief history of how ESG has grown in Europe to where it is today?
Roxana Isaiu: While ESG is a relatively new term, it's definitely not a new concept. Conceptually speaking, as an industry and as a society all together, we've always been concerned with issues of efficiency, resilience, risk, reducing costs, and maximizing profits, which is ultimately what ESG is all about - except we're not just taking the view of financial costs and profits from a very specific business perspective. We are looking at the bigger impact of our businesses. Effectively, we're evaluating impacts of real estate portfolios and funds from environmental, social, and governance perspectives, as well as the infrastructure of funds and projects.
CIRE: Looking at the adoption of ESG in Europe as a case study for North America, what obstacles did you see, and how did the commercial real estate industry overcome them?
Isaiu: One big difference between the European and North American markets is that the building stock in Europe is much older. Think of London, think of Paris, think of Rome, think of Amsterdam - these cities have long histories and a lot of historical buildings that are still in pristine conditions. And generally speaking, the managers, owners, and rural sector managers in Europe have had to deal with issues of business continuity, keeping their assets in good shape, and keeping them resilient for a longer time. In the U.S., I wouldn't say there are specific challenges compared to other regions. The real estate market in general shares a set of challenges and a set of opportunities, but there are also regional differences.
CIRE: What are keys to emphasizing the importance of ESG initiatives to those who own or manage such assets?
Isaiu: In Europe, the institutional investor community is the one that has largely driven advancements in this spectrum, like large pension funds. And in fact, GRESB, as an initiative, was set up by APG, PGGM, and USS - three of the largest pension funds in Europe. These institutional investors, with a very long-term investment horizon, effectively looked at their portfolios and observed the need for a standardized way of evaluating the non-financial performance of their investments. The institutional investor community drove ESG in Europe, and this is why we've seen these specific advancements, whereas in the U.S. and in North America, market forces are starting to have a similar impact. The pure competition in the commercial space has had a very positive influence on how assets are being operated and how ESG advancements are being incorporated into those assets.
When we talk about performance and sustainable assets, generally, I think we can use these terms interchangeably. Sustainability as a concept has a long-term horizon, so you think, “How can I make my assets and my buildings more appealing and more resilient?” It's not a matter of tomorrow or next week or one year. But how can I ensure that these assets are still relevant and are still competitive in the market in five or 10 years from now? How will the demographic changes affect the needs for the type of product I'm offering? The competition evolves, so my products need to remain competitive. And what are the returns on those? Interestingly enough, I mention demographics because real estate as an asset class is fairly stable and slowly developing.
CIRE: It seems there's been a cultural shift in understanding the importance of ESG. Hopefully, this makes the conversation easier between tenants and landlords, where sustainability is a hot topic inside business and in our personal lives.
Isaiu: Absolutely, this is an evolving topic. We also see that there's a shift in the interest in ESG coming from the younger generations. That interest is having an influence and an impact over how spaces are operated, and that impact is not only on the occupiers and the tenants themselves, but also on the immediate communities, the neighborhoods, the water supply, and the quality of the air and air pollution in certain areas. There are multiple forces that are driving toward this paradigm shift and a different way of doing business altogether.
CIRE: What two or three recent advances in ESG for commercial real estate properties are you particularly excited about?
Isaiu: Everyone is talking about data and the potential of data - and I am no exception. There is now, more than ever, the possibility of accessing information from the building level, putting it in the context of portfolios and other local benchmarks as well as potential performance targets. This is the beginning of a new way of looking at how our buildings operate and what they can do for us as opposed to what we can do for them.
We're starting to understand how well buildings react to what they need and optimize them in a way that they can really support and work for us, the occupiers. There will be a lot of unlocked potential coming from the data that we're starting to collect and structure it in a way that will help us better understand the buildings we operate.
CIRE: It sounds like, the more data you have, the less you're relying on the past ways of doing business. Can you think of one example or hypothetical where data improved ESG efforts?
Isaiu: Absolutely. The data tells us whether a building or a space is efficient or operating within the right parameters. In one case, I was talking to a property manager who started tracking the building management system. The sensors in the building noticed that, during the night, the cleaning crew was just blocking the elevator doors on all floors to make sure the elevator stayed in place and they wouldn't have to wait for it. For a few hours a night, the elevator doors would constantly try to close and open, close and open.
You may think that this action will do nothing, and you may be right if that happens one evening or two evenings or even one week. But when that happens systematically, every single day, the entire year, and then the next year, it adds up. I can't remember the exact impact in terms of dollar amount, but it was definitely not negligible. It's also something that can easily be avoided. It was just wasted money. That's just one example of how the data can demonstrate how the building itself operates.
CIRE: The COVID-19 pandemic is both a public health crisis and an economic disaster. It's hard to predict where this will lead, but do you see this accelerating or hindering adoption of ESG in the near future?
Isaiu: The situation is unfolding, so it is a bit early to talk about the big lessons learned. We've been observing a very important paradigm shift and a very intentional way of adopting ESG. I think as things calm down a little bit, people will see that this pandemic has only accelerated the relevance of structured non-financial data, especially aspects of indoor health and well-being. Indoor air quality will become more relevant, particularly in office and residential assets.
CIRE: Has the pandemic put a spotlight on a particular area of ESG that that needs more attention from institutional investors and property managers?
Isaiu: One of the very immediate impacts we see from not being able to access the assets is that it confirms the need to stay more connected. And I don't mean that from a social perspective, although, that's very important. I mean, we need systems that can ensure seamless data transfers between properties and fund managers, between the fund managers and investors, between different business units and different stakeholders in the same process. I think one of the things we will realize is that there are many companies out there that are already set up to operate in a very seamless way. And I think we'll discover some inefficiencies in the way that other data collection processes are set up right now. This is an opportunity for improvement, and this situation has uncovered certain vulnerabilities.
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