At CREtech NYC last week, every panelist, regardless of the original topic or their expertise, was asked about ESG.
Consistently, panelists responded that their company had set aggressive goals and put the reporting infrastructure in place, but still lacked a clear path to achieve their objectives (and avoid fines, in some cases).
Fortunately, that path is being blazed. Over the next few weeks, we’re going to do a deep dive on the three key components of “ESG 2.0,” where the focus shifts from high-level reporting to specific steps to improve efficiency and reduce emissions.
These involve gaining transparency and insights into the key levers that can be pulled to improve performance, namely 1) on-site staff, 2) tenants, and 3) the critical infrastructure.
This may seem counterintuitive to those who have been focused on disclosure, certifications, procurement and carbon offsets. But another of the most talked about challenges at the CREtech conference revolved around people.
As portfolios grapple with the implications of ESG, there are a number of outstanding questions related to those who run the buildings that make up portfolios.
- How do we know that the ESG data we’re looking at is accurate and verifiable?
- How can we engage on-site staff and align them with our ESG goals?
- How do we change our internal culture to complement adding new technology?
- How do we know that operators are running buildings as efficiently as possible?
- How do we do all of this given the realities of the labor market?
In this article, we’ll aim to address these questions within the broader context of ESG 2.0.
The overarching theme is that building operators must be part of the strategy and yet, they cannot be expected to drop their core responsibilities. Technology will work best when it automates “new work” related to ESG, and augments standard workflows to serve ESG goals.
ESG Data Entry and Accuracy
Since the SEC has stated that they plan to formalize ESG reporting, commercial real estate has been taking a hard look at where their data is coming from.
While this applies to ‘Social’ and ‘Governance’ reporting to some extent, it has mostly revolved around the more-quantifiable ‘Environmental’ data.
To their dismay, portfolio managers and data teams are learning how much of their scope 1, 2 and 3 emissions data is being manually entered, and how often that leads to reporting gaps and errors.
This is a good example of ‘new work’ where the job should be automated away. Manually entering utility data is not difficult, nor particularly time consuming. But when you rollup 12 months of data across dozens or hundreds of properties, there are always mistakes.
The answer to the question about data validity is simple: all portfolios should have their scope 1 and 2 emissions data connected to an ESG reporting software, which pushes (and pulls) the data to standard reporting frameworks like Energy Star. Scope 3 emissions can be more challenging, but options do exist for automatically tracking and reporting those as well.
Aligning On-Site Staff with ESG Goals
Some portfolios have tried to gamify and incentivize operators to take a hard look at their buildings and come up with strategies to reduce consumption.
There are two primary issues with these “energy treasure hunts.”
First, any changes are unlikely to stick because of ‘performance drift,’ a well-documented phenomenon in which optimizations are lost after one or two years due to the changes made in the normal course of operations.
Second, even a cursory glance at the below outline from the Department of Energy will make clear to anyone familiar with the workload of building operators why these events are often seen as time-consuming distractions.
A much better strategy to get alignment with on-site staff is to first create more time for them before asking them to take on new initiatives.
Here’s what that looks like in practice:
- Ensure that information about the building, and all of the individual assets therein, is instantly accessible from anywhere
- Bring pen and paper processes onto a mobile app, and limit the number of separate apps needed to do the job
- Alert operators to issues so they can address them before tenants complain
These may sound simple and unrelated to ESG, but a small percentage of real estate portfolios have this foundation in place. As such, operators spend a large part of their day looking for information, redundant data entry, and reacting to tenant complaints.
The result is that energy efficiency projects fall off the priority list, even as deferred maintenance causes energy consumption to rise.
A nice byproduct of the last item is that the real-time data used to identify issues can also be analyzed by software to perform that energy treasure hunt automatically, allowing operators to skip straight to Phase Three - Implementation, this time with the bandwidth to do so.
The Labor Market and Tracking Performance
All of this has to happen in the most difficult labor market in decades. The combination of experienced operators retiring at a rapid clip, long lead times to find replacements, and high turnover have forced portfolios to rethink their overall staffing strategy.
Some portfolios are deciding to outsource operations. Others are pulling staff off individual properties and making them more regional. One real estate company at CREtech said they’ve reduced on-site staff by 40%.
Regardless of the strategy, the need is clear. Owners and asset managers can no longer assume that everything is going fine as long as no issues are reaching their attention.
Successfully achieving significant reductions in emissions will require transparency into the performance of on-site teams.
This performance generally follows a bell curve across a portfolio. A few operators run their buildings extremely efficiently, the majority avoid egregious errors but have room for improvement, and a few are allowing operating expenses to be significantly higher than necessary.
Currently, many portfolios take this as a fact of life and are at the mercy of this reality. But the difference between a high performer and a low performer can be dramatic, as much as 30% more energy consumption for similar buildings. If aggressive goals are to be met, the curve must be shifted to the right.
While consumption and emissions are the primary metrics we care about for ESG, managing these in real time can be tricky given the variances caused by occupancy, weather, and the utility grid.
That’s why owners and asset managers are looking to proxy metrics that give them a good understanding of which properties are being run well in general.
The simplest option here is to measure the metrics around work orders. Operators who resolve issues quickly, consistently adhere to inspection schedules, and manage preventative maintenance vendors tend to manage energy consumption effectively as well.
As building operators become more regional instead of property specific, and as portfolios add new third party property managers, the ability to quickly and effectively determine how buildings are being operated will be able to inform decision making and resource allocation.
Conclusion
To fully achieve aggressive ESG goals, portfolios will undoubtedly need to produce renewable energy on site and likely need to purchase carbon offsets.
But renewable generation depends largely on financing, which is going to be more difficult to come by in the near term, and carbon offsets will only continue to get more expensive as demand increases.
Efficiency must be the primary focus of ESG 2.0. And the decisions made by individual building operators play a major role in that.
Of course, even the highest-performing building operators will be limited to some extent by the efficiency of the critical infrastructure they have to work with.
Likewise, tenants make up a large portion of a building’s total consumption, largely outside the control of building operators.
A comprehensive ESG 2.0 strategy takes these into account, as we’ll explore in parts 2 and 3 of the ESG 2.0 Playbook.
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