LARGE-SCALE TRANSACTIONS

Montr Al Region

T1-2023 (Jan. - March). The data were compiled with care, but neither the publisher nor Altus Group can be held responsible for any errors or omissions.

As a professor and head of sustainable development at HEC Montréal, Jean-Michel Champagne prepares future managers for emerging business issues and the socio-economic challenges of the climate crisis. Having spent a good part of his career in real estate management, he is particularly interested in working with the industry to make it sustainable and responsible.

CORPORATE RESPONSIBILITY MECHANISMS : ARE WE THERE YET?

Since the late 1990s codes of conduct, certifications, awards and benchmarks have allowed industries, including those associated with commercial real estate, to selfregulate. However, the lack of a standard of comparison hinders the transparency of organizations' ESG performance. Will the current consolidation of non-financial reporting mechanisms finally lead to a shared language? To find out, it is important to understand self-regulation tools and their limitations.

THE ADVENT OF SELF-REGULATION

One cannot talk about extra-financial factors without understanding the mechanisms that regulate companies. In the 1970s the trend towards over-regulation of companies receded in favour of economic liberalization. The latter, however, created a vacuum. Without strong regulatory mechanisms dictating what a company can and cannot do, how can we know if its nonfinancial performance is positive? And above all, how can we compare one firm with another?

Due to growing pressure from shareholders, creditors, civil society, clients, governments and the media, several industries, including the real estate sector, began to develop their own evaluation mechanisms. The early 2000s saw the emergence of numerous self-regulatory tools and benchmarks to monitor corporate performance. Using those tools led to the development of ESG factors. But how can something be measured if there is no method to evaluate it? Not all tools have the same function. They must be separated into three categories.

1. Codes, Standards, Norms and Principles

This categor y includes all documents and guides used to define ESG criteria, establish a relevant nomenclature and guide companies' thinking. These are the pillars that enable the production of specific reports and strategies.

2. Certifications, Reports and Accreditations

This category includes all tools and benchmarks used to assess the ESG performance of a given industry, and compare companies within that industry. It is generally impossible to modify or adapt those tools to each company's particular situation.

3. Voluntary Declarations and Transparency

This category includes non-financial reporting frameworks, i.e. recognized guides and tools that allow firms to report their ESG factors in consistent templates. Some are voluntary and flexible, others are binding and controlled.

Consolidation Of Standards

Like the advent of self-regulation two decades ago, the 2020s will be marked by the consolidation of those tools in an increasingly restrictive framework, and eventually, by their institutionalization through regulatory requirements.

The first standards applicable to Canadian companies will be IFRS S1 and S2. These standards will establish the basis on which all firms will have to build their non-financial reporting strategy. The two standards will allow for precise determination of ESG factors that public companies (listed on the stock exchange) must disclose annually.

Although public companies will be the first to be affected by this consolidation, experts predict that the vast majority of private companies will also have to comply to some extent in order to meet the demands of their customers, shareholders and creditors.

Impact Of Certifications

In order to meet the new requirements resulting from the consolidation of standards, commercial real estate companies could use existing certification tools to provide data for their extra-financial statements. For example, major certification programs such as BOMA Best and LEED contain elements of social and environmental performance accounting. They could be used to comply with new standards of extra-financial accounting. The problem is generally not to do the right thing, but rather to be aware of it and to consolidate knowledge of your firm in an effective manner.

Duty Of Transparency

With the consolidation of standards will come a moral or legal obligation of transparency. Historically, extra-financial reporting, often called ESG reporting or sustainability reporting, has been handled by communications and marketing teams. Research has shown that firms making extra-financial statements tend to over emphasize positive aspects and to understate or hide negative aspects.

The arrival of the new standards will change the situation, because within the next year financial teams will have to integrate ESG performance into their statements. Investors, but also creditors and clients, will gradually have access to verified, neutral and complete information.

Companies that have not yet started incorporating ESG factors into their annual reports, as well as those that are already doing so, will have to watch for the unveiling of IFRS S1 and S2 in the summer of 2023 in order to know what to do in the years to come.