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How do you quantify the impact of ESG? Move from a payback equation to a value creation formula.

NAREIM Sustainability Meeting key takeaways

March 7, 2024

The way to start quantifying sustainability improvements at the asset and portfolio-level could be to move away from a payback equation to one that instead measures value creation tied to annual savings and the stabilized cap rate.

During the NAREIM Sustainability Meeting, held in Atlanta this week, members discussed ways to quantify ESG initiatives, such as building above code, retrofitting LED lights, energy and water efficiency upgrades, tenant engagement programs and solar.

While industry practice has largely focused on calculating a payback period for the measures, one member said they had created a formula that compared the cost of improvements against the value created for the asset come its disposition.


  • Using a simple formula of annual savings divided by the current stabilized cap rate of an asset, the firm was able to compare and contrast the cost of efficiency retrofits, developing above code requirements and tenant engagement programs around energy conservation, with annual savings and the value created by the improvements.

The member said a third party conducted the annual savings analysis to remove potential concerns about conflicts of interest and that a cap rate was frozen at the time of any asset sale.

While there was a lot more work to do moving beyond energy tracking, such as the impact of resiliency on insurance premiums and social initiatives on occupancy and rent, the member said the formula had been received well by investors and brokers.

During the NAREIM Sustainability meeting in Atlanta this week, members discussed how sustainability measures and a deeper knowledge of secondary characteristics could help lower insurance premiums – as well as how to turn energy audits into a Net Zero for almost no cost and enhance due diligence process by adding climate risk and ESG data into PCAs.

Other key takeaways included:

Insurance premiums are set to drop in 2024.

But ESG teams can work more closely with risk/insurance and architecture and engineering to achieve even lower reductions. Recommendation: Review the Statements of Value as a team to understand every improvement and measure done at the asset or portfolio-level and to communicate that with insurance brokers and carriers.

Transition risk:

92% of managers are tracking transition risk, with more than half of those incorporating it into risk and/or deal models.

Net Zero & Energy Audits:

There are 9 cheap ways to turn an energy audit into a Net Zero audit, including no cost measures such as understanding incentives, green power and solar as an energy conservation measure – and low-cost options such as CRREM, BEPS ordinances and solar feasibility studies.

One member recommended using Energy Star’s Portfolio Manager data explorer, a free tool to conduct an energy audit of existing properties, against a cohort of 50-100 similar properties.

As part of the group discussion on Net Zero targets, one member advised setting near-time emissions reduction goals, such as for five years out, versus 2050. That way a firm can show meaningful action was being taken to reduce GHG and drive value and that the firm was on an action-led Net Zero pathway.

Enhanced due diligence

In reviewing the due diligence process there are key ways to add value for ESG, asset management, deal and portfolio management teams  - add climate risk and ESG data to PCA scopes of work.

By asking for additional data, firms can better inform asset management planning and budgets, help build more robust asset management strategies to drive NOI and help insurance negotiations.

The key lesson learned by one member in developing an enhanced due diligence process was to work collaboratively and in support of asset management, portfolio management and deal teams to collect the data, and incorporate the results into both preliminary and final investment committee memos. 

Other members highlighted the need to “speak the language of the deal team” and to partner with asset managers, particularly junior analysts and associates as well as senior portfolio managers.

The attendee list and presentations can be accessed by emailing IvyLee Rosario at

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