Having recently spoken on a panel at a DC Metro ESG/Impact Investors Network event in Washington DC, Edward Smith Ph.D, Director – Sustainability Services at JTC, reflects on how approaches to sustainability are evolving in the real estate sector and how the industry is adapting to a world where reporting and disclosure obligations are increasingly sophisticated.
It seems there’s not a week goes by without some form of consultation or new guidance on reporting requirements relating to ESG, impact investment or sustainability being published. Although there is an appetite to bring some form of standardization to such requirements, there is still divergence – and that is creating challenges in all areas of asset servicing.
In the US real estate space, it is no different – something that came under the spotlight at the recent DC Metro ESG/Impact Investors Network event, hosted in Washington DC by Redbrick LMD. Progress is being made though, with construction and property investment firms asking more and more questions around what best practice looks like, as Dr. Ed Smith explains:
“Today, the sort of investment aimed at creating social impact comes in numerous guises – sustainability, impact investing, ESG investing. And firms are really getting to grips with how they can illustrate the positive impact they are making and asking themselves difficult questions – how are they engaging with the community? How are they incorporating sustainable philosophies into the development process? That’s all progress.”
With terminologies and parameters in the sustainability space changing so rapidly, it can be difficult to pin down what specific obligations might be, or where a firm might start on their sustainability reporting journey.
“One of the key takeaways from this event was the importance of honest and objective sustainability reporting,” says Ed. “There are multiple stakeholders who are interested in knowing the environmental, social and economic impacts of real estate projects. Defining who those stakeholders are and thinking about what it is you want to tell them and what you can tell them – honestly and robustly – is critical. A firm might not have the resources to do everything, so having some clear initial objectives is a good place to start.”
Establishing a baseline is important, as is identifying who the reporting is being done for and why. Is reporting being done for government officials, for a certain class of investors, because the community demands it, or for internal reasons because a firm is a mission-driven organization? All of those questions will set out the parameters and inform what metrics are needed and what is deliverable.
Once the firm has decided it is going to go down this route and set out why it is reporting and for whom, the next step is putting place the mechanisms to do it well.
“It then becomes a question of data,” says Dr. Smith. “Firms need to identify where the data is that they need, whether there is sufficient quality data and, if they need to get more, how they are going to source it. From there it’s about managing data so it can be collated and presented in a way that is coherent, robust and in line with the objectives set out at the start. There has to be a clear process in place and lines of responsibility as to who is going to do all that, and that’s where a firm like JTC comes in.”
Often it can be an issue of capacity and skills, and whether a firm has the in-house expertise and resource to actually do the necessary environmental, economic or social impact studies.
“At the moment, often the answer to those question is ‘no’,” says Ed. “But that’s ok – firms have to be honest, and the desire to get to the point where they have that experience and competence is rising all the time. We see our role as trying to help firms get to grips with what they want to achieve and give them the outsourced expertise, resource and capability to do that.”
One particular area of importance in the real estate space is the analysis not only of environmental credentials but societal too, as Dr. Smith explains:
“Environmental impact elements are relatively obvious, or at least quantifiable – carbon footprint and capture, for instance. When you talk about social impact, however, it gets more challenging. How do you determine the social impact of a $30m hotel or a mixed-use development, for instance? From there, it’s about the qualitative analysis as well as the quantitative, and that requires a different approach, methodology and skill set. Numbers frequently don’t tell the whole story.”
There’s no doubt the landscape continues to change. Reporting in the US is still largely voluntary but that could change, with pending SEC regulations that could impact real estate-related capital raises touching the US.
“It’s still a fragmented landscape,” says Ed. “Domestically, even within the US, there are different obligations and when it comes to reporting, and there are significant differences between the rules in the US and Europe too. All that can make it difficult for firms to know what they should be doing, particularly when it comes to international capital flows.
“Again, that’s where firms like JTC that have multijurisdictional experience can play a critical role, applying different market approaches and applying those to meet investor and developer goals.”
Despite that complexity, it’s clear that the US real estate industry is placing an increasing emphasis on sustainability reporting and it will be a key area of evolution over the coming months.