3 Ways ESG Reporting Leads to Better Financial Performance

ESG (environmental, social and governance) reporting is getting a lot of focus in commercial real estate circles these days.

No doubt, some of the focus is driven by genuine altruism from owners and operators, but likely a bigger factor is that portfolios are finding that they can’t compete for capital without a strong ESG program in place.

But what is motivating lenders and investors to require ESG disclosure? Surely, the threat of climate change, changing social standards, and a spotlight on inequities play a role.

Why now though? These issues have been around for a long time. The reason ESG disclosure is now required is due to the emerging body of knowledge that shows a positive correlation between ESG and financial performance.

But how?

A cursory look at the messaging from ESG frameworks and software companies that streamline reporting offers some abstract ways that reporting might lead to better outcomes.

Things like “ESG fosters cleaner and more efficient practices that drive down your company’s operating costs and environmental footprint” or “ESG’s roots in proactiveness and risk management produce the structures and systems in place to handle risks.”

It makes sense conceptually, but the specifics are vague. Here are three legitimate ways that ESG reporting leads to better financial performance.

Tenant-Level Analytics

Energy consumption is a key metric in ESG reporting. If one portfolio’s buildings consume less energy than a portfolio of similar assets, it will be rewarded with a better score and therefore access to capital and better PR (in addition to lower operating expenses and fulfilling altruistic aims).

But how do you consume less energy?

There are certain areas within the control of operators. Purchasing more efficient boilers and chiller plants, operating tight schedules and temperature settings, ensuring that maintenance is performed regularly so that equipment runs as intended all lower consumption.

But after all of this, most commercial landlords only directly control around 70% of their building’s utilities. The rest is controlled by the tenants.

That’s why reporting frameworks such as GRESB now require that performance indicators, including energy, water, GHG emissions, and waste must be monitored and reported in both landlord and tenant-controlled spaces.

Whether it’s fair or not, landlords have to start capturing and reporting on tenant consumption. Fortunately, while tenant behavior can’t be controlled, it can be influenced.

Many portfolios, particularly office and retail, have been submetering their tenants for years or decades. However, the current process is a missed opportunity to engage tenants and give them the tools they need to support performance goals.

Instead of attaching a difficult-to-understand submeter bill on the end of monthly rent, software can be used to generate highly interactive bills with benchmarking, comparisons, gamification and a translation to environmental impact of consumption.

This data can populate ESG reporting automatically and the greater transparency can often lead to increasing utility cost recovery by tens or hundreds of thousands of dollars a year.

Leasing

In addition to utility cost recovery, modernizing the tenant submetering process to keep up with ESG reporting can have benefits in a very unlikely area: rent rolls.

Stacking plans are used by brokers and property managers to make sure they are on top of upcoming vacancies.

These visualizations are also used by asset management and acquisitions teams when selling a property to give a quick snapshot of the tenants in the building and when their terms end.

The problem is that they are a pain to update. In some cases, stacking plans are generated from the property management system only every 6 months or so. That leaves the stakeholders who depend on this information a step behind in a market where speed can make all the difference.

Sure, you could add “updating the stacking plan” to the top of someone’s already busy workload and hope to get a more real-time picture.

Or you can take advantage of an existing process that already tracks tenant move-ins and move-outs in real time: tenant submetering.

There is no reason that the leasing team should have to build stacking plans. They can be automatically generated from the same tenant submetering software used to engage tenants and increase recovery rates.

Focusing Investments

Interestingly, according to a report produced by NYU and Rockefeller Asset Management, disclosure alone did not drive financial performance; companies that measured ESG metrics without an accompanying strategy tended to see a neutral or negative correlation with earnings.

What is that accompanying strategy though?

It’s actually pretty simple. First, use high-level ESG data to determine the worst-performing assets.

Next invest in capturing more granular data, either by tapping into a building management system (BMS) or deploying equipment monitoring if a BMS doesn’t exist.

That data, along with analytics, is basically doing the same triaging process. It identifies where to focus your efforts.

Without ESG reporting, it wouldn’t be clear which properties could benefit the most from granular data and insights. It is one of the clearest ways to take the risk out of investing in cost-cutting measures.

Conclusion

It’s a bit of a leap to say that ESG disclosure will necessarily lead to better financial results. In fact, the study from NYU and Rockefeller Asset Management found that the opposite - that there’s a negative correlation with earnings is not coupled with an accompanying strategy.

That strategy is clear. Engage with tenants through submetering, help leasing and asset management with real-time stacking plans, and use high-level data to triage the portfolio to make the highest level investments.

There is a market of technologies that can achieve each of these three components: ESG reporting, tenant submetering and equipment-level data and analytics. There are also platforms that can do the same for a lower total investment and more integration.

The Enertiv Platform can support ESG reporting, tenant submetering, equipment monitoring and more? Schedule a demo today to learn more.