Nils Kok is fresh off the plane from Australia, where he held discussions with nine different pension funds on a whirlwind tour. Before that he was in South Africa and in Qatar. Soon he will join his colleague, Piet Eichholtz, on a trip to Germany. And Eichholtz was in Brussels last week.
Why the flurry of activity? Kok and Eichholtz, respectively associate professor and professor of Finance and Real Estate at the Maastricht University School of Economics and Business (SBE), are out to promote an initiative they co-founded with colleagues and practitioners. Conceived as recently as 2009, the Global Real Estate Sustainability Benchmark (GRESB) is now starting to find its legs – and then some.
GRESB sheds light for institutional investors around the world – typically pension funds – on which real-estate portfolios perform best when it comes to sustainability.
That’s the good news. Even better news? “When pension funds invest in sustainable real estate portfolios, they make more profit,” says Eichholtz, “which means our pensions are well maintained, and at the same time they’re doing something good for society.”
Benchmark for sustainability
SBE researchers have long been studying sustainability issues. Now, GRESB provides a practical tool that makes sustainability measurable for society. In launching the initiative, Kok and Eichholtz were joined by their SBE colleague Professor Rob Bauer; Arjan Keijzer, who now heads GRESB operations; and Sander Paul van Tongeren from the APG pension fund. “This is a joint effort of SBE, APG and PGGM”, says Eichholtz. “So it’s a great example of collaboration between academia and practice.”
GRESB’s mission, according to its website, is to “assess the environmental and social performance of public and private real estate investments” through the benchmarking of best practices in sustainability. In this way, it aims to enhance sustainability reporting, strengthen the market forces needed to usher in the winds of change, and ultimately enable investors to improve the overall sustainability performance of their investment portfolio.
GRESB now offers information on 340 real estate portfolios around the world, worth close to a staggering US$1 billion. And joining APG and PGGM as institutional investors are more than 20 big players in the pensions industry, from Mn Services (Netherlands) and USS (UK) to large funds from Australia, Denmark, Canada and elsewhere.
So how, exactly, does GRESB work? In short, the participating real estate companies answer an annual questionnaire that measures their properties on seven sub-categories relating to environmental and social performance. Based on these surveys, they then receive an overall GRESB score. This score is divided into two categories: Management & Policy (worth 30% of the final score) and Implementation & Measurement (worth 70%). In other words, strong policy measures with little to no implementation will result in a low overall score (which “rewards action more than words”, as the GRESB website puts it). The survey data is synthesised into a detailed report and made available via an online portal to the participating investors – the pension funds.
“These funds want to make a responsible investment in real estate, but until now they had no way of telling if they were doing so. What GRESB now offers them is a tool to judge whether a particular property is sustainable or not. Essentially, we’re interrogating the real-estate companies on behalf of investors, to find out how green they really are”, says Eichholtz.
“The report also sheds light on what improvements are possible, and where pressure can still be exerted. Environmental impact, water and electricity consumption, CO2 emissions – they’re all addressed by GRESB. And they’re all very important for investors, because looking after your building properly yields returns. Not just in terms of the energy bill and work enjoyment, but also because you get more return on your investment. Research at SBE shows that many companies prefer sustainable buildings: the quality and comfort of a building are important. Drafty buildings are significantly less valued than well insulated buildings with good air quality. So ultimately, GRESB is a mechanism that leads to lower emissions and shows that sustainability and returns can go hand in hand. Investing in sustainability also leads to profit.”
Pension funds can play an active role, too, by giving direct feedback on the real estate portfolio. In this way, they can actually have a dialogue with the real estate companies and make concrete agreements on improving sustainability performance. Then, of course, GRESB will measure if the required steps have actually been taken.
And it seems to be working. GRESB has already revealed notable improvements in the area of sustainability. Of the 340 participating real estate companies, 65 have received the coveted ‘Green Star’ label. This brings the proportion of Green Stars to 19%, up from 10% last year. “And this really prompts the other companies to try to improve their performance as well”, says Eichholtz. “We know this, because they get in touch to see exactly what they need to do to be a Green Star.” In 2010, these companies reduced their energy consumption by 3%, their water usage by 4%, and their CO2 emissions by 3.5%. Better insulation, less air conditioning, movement sensors and other measures are all to thank for these improvements.
Broadly speaking, real estate portfolios of offices and shops do best in terms of green performance. Eichholtz: “Other types of premises – industrial complexes, apartment buildings, hotels – do relatively badly, partly because the occupants of these premises determine the way in which energy is used there.” And it’s Australian real estate that tops the rankings, winning out by a steep margin against portfolios in Asia, Europe and America. “In Australia they’ve been concerned with sustainability for longer, and have been adjusting their policies accordingly.”
It may be, of course, that one explanation for GRESB’s success is simply that sustainability is a hot topic. “The trend was certainly underway,” concedes Eichholtz, “but with GRESB, pension funds can really get stuck into the market and give it that extra push. It’s about time that investors seized the initiative to invest only in green buildings. And thanks to GRESB, they can do that now.”
With Kok, Eichholtz and colleagues continuing to travel the world over, piquing the interest of pension funds and other institutional investors, the future looks good. “The more pension funds use GRESB, the more real estate portfolios will fill in the survey. Which now only happens once a year, but that might increase in the future. GRESB is the benchmark of high quality, and shows that we can make real changes in the world.”