ESG 1.0 vs. ESG 2.0

By Connell McGill

Connell McGill co-founder and CEO of Enertiv

As the real estate industry responds to pressure from inside and out to take environmental, social and governance issues (ESG) seriously, property firms are setting increasingly ambitious ESG goals. But the data used to set these goals is insufficient to drive meaningful action. How do firms move from simple measurement and disclosure to actually improving outcomes?

Over the last 10 years, the growing realization of humanity’s obligation to protect the world we live in has started to shape the outlook of almost every developed economy. Spurred by a growing understanding of how global warming is impacting the world around us and championed by a passionate Gen Z, more and more people see climate change as the biggest existential threat facing humanity today.

Lawmakers, businesses and citizens are all responding accordingly, making significant changes in a bid to be more sustainable and environmentally conscious. Across the United States, cities like New York, Boston and Los Angeles are taking matters into their own hands and passing laws designed to reduce carbon emissions at both a corporate and individual level. When it comes to business, industries like retail are thinking about everything from the way their products are made to how they are packaged and delivered. Even major oil and gas companies are investing heavily in renewable energies. But what about the real estate industry?

Encouragingly (and while there is still plenty of work to be done), there is lots of evidence to suggest that the real estate industry is fully aware of the importance of ESG factors on the way it builds, invests and operates. Many major real estate companies and brands are leading the way in applying ESG standards, setting the tone for the rest of the industry. Whether it’s developing greener buildings (the “e” bit), tackling social imbalances through greater provision of affordable housing or care centers (the “s” bit), it’s rare to find a company that hasn’t committed to ESG standards in its long-term strategy.

Importantly, investors are also bringing their weight to bear by ensuring they invest responsibly and not purely for financial gain. The fact is, what money says matters a lot. The ESG stance taken by BlackRock, for example, has seemingly shifted the investment community overnight. Participation in the Global Real Estate Sustainability Benchmark (GRESB) real estate assessment — the investor-driven global ESG benchmark and reporting framework for listed property companies, private property funds, developers and investors — is increasing rapidly. Ten years ago, this level of commitment to sustainability, social responsibility and governance were only for a few. Now, it’s for the many, as investors are judged for their ethics, as well as financial results.

What’s abundantly clear is that whether or not individual real estate companies and leaders are as passionate as Gen Z, ESG is now a fundamental part of strategic decision-making within the industry. What’s also true is that progress differs from company to company. Commitment to ESG is very much on a broad spectrum. While the vast majority of real estate players recognize its importance, many are still trying to work out exactly what it means to implement a meaningful commitment to ESG as part of their day-to-day operations. As owners and operators are increasingly held accountable for their environmental and social impact, how can they evolve from measurement and disclosure to a clearly defined plan of action? We believe that the simple answer is for most companies to move from ESG 1.0 to ESG 2.0.

ESG 1.0 is the first step most real estate owners and operators have taken to demonstrate commitment to sustainability. What does this look like in practice? Broadly speaking, ESG

Headshot courtesy of Enertiv

1.0 is essentially the work of centralizing utility consumption data, either through brute force (manual processes) or using software (automated processes). Once the data has been centralized and visualized, it can then be used to benchmark a portfolio or buildings against each other, as well as against the wider industry. This is often done through reporting frameworks like Energy Star and GRESB. But ESG 1.0 doesn’t go far enough.

Now that companies have submitted their utility data for several years, they have access to a bank of data, which provides a baseline from which they can measure. Using that baseline, they have been able to set clear ESG targets, such as becoming net zero by 2050. ESG 1.0 may help set the goals, but ESG 2.0 helps companies to achieve those goals. ESG 2.0 helps companies get from their baseline to meet the ambitious change targets they’ve set.

Monthly utility bills are not granular enough, both in terms of the time frame and of the components that make up that high-level consumption. What’s needed is transparency into the three primary drivers of consumption: tenant usage, common equipment usage and the performance of on-site staff. It’s this granular level of detail and insight that ultimately drives actionable change.

For example, granular data for common equipment usage can be analyzed to drive greater efficiency by making changes to the way it’s used, or perhaps even creating a data-driven capital plan for upgrading equipment over time. Another example may be the use of modern tenant submetering to provide better transparency into usage. In turn, this information can then be used to help support tenants’ own ESG initiatives, as well as influence the behaviors of their workforce at an individual level.

Having access to granular data that identifies where meaningful changes can be made across day-to-day operations ultimately results in meaningful outcomes when it comes to sustainability and ESG. ESG 2.0 is all about truly actionable insights.

The reality is that for the last 18 months, the commercial real estate industry has been scrambling to get its ESG reporting in place. The baseline expectation is that investors, owners and operators take their environmental, social and governance responsibilities seriously. In a bid to meet those expectations, quarterly reporting has naturally led to ESG goal setting and the need for clear plans of action to deliver meaningful outcomes. ESG 1.0 may have helped in setting targets, but ESG 2.0 will help the industry deliver on them. Embracing technology to access granular insights from boardroom to boiler room is absolutely vital in both measuring and improving ESG performance. Those that do will set themselves on a path to achieving the environmental goals they have committed themselves to.