Who’s judging real estate’s environmentalism? The industry itself

Companies and institutional investors set their own ESG standards

(iStock/Illustration by Kevin Rebong for The Real Deal)
(iStock/Illustration by Kevin Rebong for The Real Deal)

Last fall, Big Real Estate gave itself a pat on the back for being environmentally and socially responsible.

When a referee for ESG investing issued its annual scores, companies including Ivanhoé Cambridge, Prologis and Vornado Realty Trust touted highlights such as a “Green Star” rating or improvement from the previous year in one of the categories.

What the companies failed to disclose, though, was that each has an employee on one of the committees that helps create the standards. Picture students creating questions for an exam, then crowing about acing it.

Real estate’s use of the referee, Netherlands-based GRESB, raises a broader question: Can the industry be impartial enough to self-govern when it comes to climate change?

GRESB does not bill itself as an outside arbitrator. It describes itself as a member-led organization “by industry, for industry.”

“The problem with GRESB is that I don’t see institutional investors demanding enough,” said Stuart Brodsky, director of the Center for the Sustainable Built Environment at New York University’s Schack Institute of Real Estate. “The reason why they don’t is because it would hurt their bottom line.”

A spokesperson for Prologis said the company’s work with GRESB’s benchmark committee is to “provide input so that GRESB’s assessment includes relevant data and priority topics.” A spokesperson for Ivanhoe Cambridgé wrote in an email that “Any thorough investigation of the GRESB criteria will clearly show that its scoring methodology is well thought out, robust, verifiable and impactful.”

ESG in the past year has become one of the most buzzy — and controversial — areas of investing. Some $35 trillion has been earmarked for companies that show progress on environmental, social and governance issues. By 2025 that figure is expected to hit $53 trillion, which would make up a third of assets under management.

To supporters, it’s proof that corporations are serious about tackling the world’s biggest problems, such as climate change. But it’s also been called “greenwashing” — providing a benevolent sheen to companies that aren’t really doing good.

It’s of particular importance to the real estate industry, which accounts for 39 percent of the world’s carbon emissions.

Dan Winters, head of the Americas for GRESB, said real estate needs its own set of ESG guidelines. It’s important that real estate companies have a voice in shaping those standards, he said.

“We have to meet the industry where it is,” Winters said. “The other way is for people to figure out how to foist something on the industry. That will never work.”

Closed by design

rnrn“The reason [institutional investors] don’t [demand more] is because it would hurt their bottom line.”rnrn

Stuart Brodsky, NYU

GRESB evaluates entire companies, unlike accreditations such as LEED, BREEAM and WELL, which are applied to individual buildings. The purpose, Winters said, is to give institutional investors the information they need on real estate operators.

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“You start to talk about the alphabet soup of standards and people will confuse various things that are important to different stakeholders,” he explained.

The firm was founded in 2009 by large pension funds in the Netherlands and the United Kingdom and has grown to be the industry standard for ESG benchmarking in real estate. Its 1,520 participants manage $5.7 trillion worth of assets.

By aligning themselves with GRESB, real estate owners are implicitly rebuking more generalist benchmarkers such as Sustainalytics and MSCI.

A key difference is that anyone can look up a company’s ESG score on Sustainalytics or MSCI (the latter of which, according to a recent Bloomberg investigation, is more focused on the environmental impact on a company’s bottom line, rather than a company’s impact on the planet). GRESB doesn’t publicly disclose scores for the companies it ranks.

Winters said it was “designed to be a closed system.”

In October, GRESB did release aggregate numbers for its 2020 survey, which showed an average score of 73 out of 100, up from 70 the year before. The company shares its data with S&P Global, which in December published a snapshot of the best and worst performers.

The highest rated REITs were Kilroy Realty and Vornado, with scores above 93.

At the bottom, with scores in the 30s, were a trio of industrial REITs: First Industrial Realty Trust, Terreno Realty and Rexford Industrial Realty.

Nonprofit to set standards

The new face of GRESB is Sebastian Roussotte, a French tech tycoon who leads the investment research firm Style Analytics.

Roussotte took over the job in June from GRESB co-founder Sander Paul van Tongeren after a management-led buyout from Green Business Certification, the company that oversees the LEED and WELL certifications.

GRESB is now owned by the private equity firm Summit Partners, which has invested in companies such as Brooklinen and Uber.

Under Summit, GRESB has shaken up the c-suite, bringin on a slate of new executives as the company looks to expand. Winters said new environmental regulations — particularly in Europe, where GRESB’s roster of firms is strongest — provide opportunities for growth.

He said membership costs about 4,000 euros.

Under its new ownership, GRESB is splitting itself into two entities: a foundation responsible for setting the standards and a for-profit business that will do the grading. GRESB says this will help safeguard the sanctity of the standards.

“That’s why people get agitated about greenwashing. There’s no accountability,” Winters said. “The only way to have accountability is if you can track data, and I’m quite pleased we’ve been able to accomplish that over the past 12 years.”