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Introduce preliminary IC meetings to implement ESG change

NAREIM Sustainability Meeting 2020

September 22, 24 and 29. 

One solution to incorporating and enacting ESG strategies into the business includes allowing non-investment teams to call preliminary investment committee meetings to discuss potential issues, NAREIM’s Sustainability meeting heard.

The accountability idea: Rather than relying on the investment committee memo to raise issues relating to ESG strategies, members at the Sustainability meeting – which took place over three sessions this and last week – described how their firms had introduced new measures to better incorporate firm-wide ESG strategies into deals earlier:

  1. Getting designated sustainability teams and professionals to provide an initial screening of acquisitions well before IC.

  2. Allowing sustainability leads, risk, research, investment teams, portfolio managers and others to call a preliminary IC meeting to discuss potential downside scenarios. The preliminary IC could also discuss potential solutions, such as having a maximum hold period.

  3. Requiring acquisitions teams to identify energy efficiencies already in place in an asset and devising a carbon mitigation plan for all transactions.

Data comes first: Whether the ESG priority relates to energy efficiency, net zero, resiliency, climate risk or health and wellness, NAREIM members stressed good data was critical – and that ESG only worked well when embraced across functions and departments.

What were the takeaways of the Sustainability meeting?

Covid can help introduce green leases

As managers work closely with tenants on rent deferrals or changes to leases, managers can use the opportunity to insert “green” clauses relating to data sharing and cost recovery.

  • One challenge in reporting to certifications, such as GRESB, has been collecting data from tenants – however in discussing modifications or extensions to a lease, managers could also insert green clauses to ease future reporting needs.

  • New leases should also incorporate green clauses relating to data sharing, as institutional investors increasingly press for more asset-level ESG performance metrics – or inclusion of assets in industry benchmarks.

Net zero

Measurement is the biggest hurdle when it comes to implementing a strategy to become carbon neutral or achieve net zero emissions at the asset or portfolio level. But understanding the question – how much greenhouse gas emissions (GHG) do I need to offset tomorrow? – is critical to any progress.

Other questions to answer in the path to net zero, included:

  1. What scope of emissions are you following? Scope 1 (direct emissions under your control); Scope 2 (indirect emissions from electricity purchased and used by your organization/asset); Scope 3 (all other indirect emissions, outside the control of the company/asset).

  2. Are you measuring space within or outside of your direct control as landlord (ie, tenant spaces). Two case studies were presented at the Sustainability meeting – one incorporating tenant spaces and one without.

  3. Where do you start? You can easily, and cheaply, buy renewable energy credits (RECs) – but is that what your investors and tenants are looking for? Energy efficiencies were first for the meeting case studies, followed by a differing mix of on and off-site renewable energy, green utilities and the electricification of assets, RECs and offsets.

  4. Are you including embodied carbon, or the carbon footprint of your building materials, in your target?

Health and wellness

Covid has brought health and wellness to the forefront of many ESG conversations – but it’s early days in relation to data.

Solution: Members agreed to bring together case studies reviewing lease and duration performance data for health and wellness certified-assets in the coming months to answer the key question – how much connection is there between health and wellness strategies and asset value?

Other questions raised during the discussion, included:

  1. If one key marketing metric of healthy buildings is employee productivity, how do landlords access the data?

  2. Will technologies help? One member highlighted the cognitive health app Winterlight, to help understand dementia and clinical depression among seniors and students. For Covid, surface test technologies may assist with spot checking by tenants.

  3. Will tenants pay more for healthy buildings, and will they say longer in the asset?

Certifications – are they necessary?

It depends on each firm, member agreed, with some leaning on the certifications to provide a framework for their own strategies, while others preferred to focus on the goal and evaluate certifications later.

Some members spoke to being “compliant” with certain certifications to show the intent of the strategies but to alleviate the firm and teams from reporting requirements. All agreed, the performance at the asset and portfolio was the primary driver., irrespective of whether it came with a seal of approval.

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