With over 2,000 participating property portfolios worldwide, the Global Real Estate Sustainability Benchmark (GRESB) has become the benchmark for sustainability in the property industry. Friedel Bachmann, an expert in sustainable portfolios, explains the significance of GRESB results and their impact on the sector.
The real estate industry is changing. Hardly any other institution demonstrates this as clearly as the Global Real Estate Sustainability Benchmark (GRESB). Since its introduction over 10 years ago, the number of participating companies in Switzerland has increased from the original six to 67 and in Germany from 21 to 115! Last year, over 2,000 real estate portfolios worldwide were assessed as part of the sustainability benchmark.
It's high time to take a closer look at the vessel. Dr. Friedel Bachmann, Head of Service Unit Sustainable Portfolios, and his team support various large companies from the DACH region in entering data and interpreting the GRESB results. In this interview, he explains what is meant by a good GRESB result, how it is made up and what challenges can arise when entering data.
Friedel, GRESB is obviously very popular. Why is that?
More and more institutional investors are focusing on sustainability and long-term values. In the wake of increasing regulations and social demands, shareholder value is also increasingly being viewed over a cross-generational time horizon. GRESB scores and the data on which they are based help real estate owners and investors to understand the relative ESG performance and risk of an asset within a fund or company and compare it to the market.
The momentum of GRESB is very high, the benchmark has now almost reached "critical mass". Many large portfolio owners are actively participating. This naturally puts pressure on the rest of the market to also participate in order to offer the required transparency and comparability.
Which real estate portfolios are suitable for a GRESB valuation?
Most participants focus on the existing portfolio or so-called standing investments ("performance") when submitting their entries, as the net zero targets are pressing and the regulations currently focus in particular on consumption emissions in the operating phase. However, it is also possible to have development portfolios ("Development") assessed. Other data is required in this case, for example on the handling of all construction emissions or gray energy.
GRESB evaluates portfolios according to various focal points and property types. Retail properties, office and residential buildings are entered particularly frequently. However, there are now also special classes with other types of use such as logistics properties, hotels or nursing homes and healthcare facilities.
Is there evidence that participation in GRESB reporting has a positive impact on the performance or return of a real estate fund?
An academic study published in 2022 by various universities from the UK, the US and Hong Kong examined the relationship between the financial performance of NCREIF Open Ended Diversified Core Equity (ODCE) index funds and ESG reporting with GRESB. The results show that GRESB reporting is associated with a 0.35 percent increase in an ODCE fund's quarterly total return.
I am not currently aware of a similar evaluation of real estate vehicles in the DACH region. However, I am convinced that improved sustainability performance can contribute to increasing the value of real estate and reducing risks in the medium term. At the moment, however, the focus is on transparency. It's about being able to better assess your own efforts and compare yourself with your competitors.
Sounds like a lot of effort without tangible results...
I wouldn't agree with that. The companies we support with the GRESB submission are actively working to improve their scores with each participation. The results are studied in detail and - where appropriate - broken down to the individual property. Measures to promote the individual sustainability aspects are then defined and implemented. In this respect, GRESB definitely provides tangible information and helps to make the building stock more sustainable and climate-friendly. This can also be seen from the fact that the GRESB scores in Europe alone have improved significantly over the years.
What exactly does this kind of support look like, or to put it another way: how does this kind of input work?
Our support with the GRESB submission is divided into a data-savvy part, which basically comprises the preparation of consumption data, and a qualitative part, which concerns aspects such as reporting, guidelines or strategy.
We offer our customers a comprehensive "one-stop-shop" type of service that accompanies the entire process. Much like a fiduciary office when completing a tax return. In other words, we provide support in obtaining the necessary data and close any gaps. We assist with the correct interpretation of the individual aspects, optimize the input as far as possible and enter the required information into the GRESB system in a timely manner. We also categorize the results and help the portfolio and asset management to derive tangible action guidelines and measures. In many cases, we also support the implementation of the defined measures.
What challenges do you encounter in the process?
Merging data from different sources is particularly difficult. Although data flows are becoming increasingly automated and standardized, they originate from different systems, are aggregated differently and have to be merged under time pressure. As GRESB only accepts original data, we often work with a time delay of several months, as utility bills, for example, are often still outstanding.
This brings us back to our favorite topic, digital transformation. In theory, it should be possible to call up a service charge statement at the touch of a button, right?
Unfortunately, this is not yet the case in practice. The time it takes to provide a service charge statement often depends on the management company. Sometimes we therefore have to request the data directly from the energy companies, which is more time-consuming and incurs additional costs.
Ideally, the systems should interact with each other, learn from each other and be connected via interfaces. However, this raises many questions about data protection, especially when it comes to sensitive tenant data. The traceability of information is of great importance to our customers, as the entire data flow, data sources, preparation and calculation of key figures are increasingly being audited, similar to the case with key financial figures.
It therefore requires some lead time. When does the GRESB process begin and by when must the input be completed?
Depending on the size of the portfolio, we either start in January or in March at the latest for smaller portfolios. The deadline for all submissions is the end of June. The preliminary results are published in September, although errors can still be corrected, and the final results are published in October.
What does GRESB measure?
GRESB evaluates real estate portfolios in two categories: "Performance" (existing portfolios) or "Development" (development portfolios) and "Management". Aspects from all three dimensions E (Environment), S (Social) and G (Governance) are assessed. A maximum total of 100 points can be achieved. Performance / Development accounts for 70 percent of the overall score. The management part accounts for 30 percent and is identical for existing and development.
- The performance score measures the sustainable performance of the real estate portfolio. Among other things, information on energy and water consumption, greenhouse gas emissions and the amount of waste must be submitted. Measures that promote energy or water efficiency are also recorded.
- Meanwhile, a development score is calculated for development portfolios. It measures the consideration of ESG issues in the planning, construction and maintenance of buildings. Here, the focus is more on real estate strategies, construction guidelines, site selection and gray emissions.
- The management score corresponds to a qualitative assessment and measures typical aspects such as the existence of sustainability guidelines and strategies, reporting and risk management. It also includes topics such as leadership programs, gender diversity, employee satisfaction and the age structure of the workforce. More important than the actual content is that the documents and processes are in place and that options for action are identified.
- What results are published?
- The results are published in the form of a benchmark report. The individual results include the number of points achieved per category and the number of stars based on a relative ranking. The top 20 percent receive five stars, while the remaining participants are ranked according to the quintiles below them.
In addition, participants receive the "Green Star Label" if they achieve at least 50 points in both the quantitative (performance/development) and qualitative (management) sections.
When is a GRESB ranking considered a good result?
A good GRESB result is characterized by a high score and good performance in the various assessment categories and certainly also depends on how often you have already participated in the benchmark. The initial effort is usually so great that certain requirements, such as data on tenant electricity, can only be entered in subsequent years. Before that, the focus is simply on more urgent information. GRESB should therefore be understood as an iterative process in which the individual fields of action are gradually improved over the years.
In principle, the more stars the real estate vehicles receive, the better they perform in the market comparison. For the initial entry, a result of two to three stars can be considered good, while those who have been around for longer should aim for four stars. Only the "Industry Leaders", i.e. the top 20 percent, receive five stars. Experience shows that it is very difficult to break this barrier.
What do portfolio holders need to look out for if they want to achieve four stars?
For existing portfolios, high coverage of consumption data, the proportion of certified space in the real estate portfolio and broad-based tenant engagement are decisive factors. The associated measures are often costly, complex and time-consuming for companies. It is therefore much more difficult to excel in the quantitative area. Currently, a high level of data coverage is still central to a good valuation. In future, the actual performance, i.e. the specific energy and CO2 intensity in the reporting year as well as in a year-on-year comparison, will increasingly come into focus instead.
The GRESB rating tends to correspond with strategically oriented, structured data management. If you want to improve here in the long term, you are well advised to invest in digital infrastructure and a professional data strategy.
In conclusion: How do you think the real estate industry will develop thanks to GRESB?
The reciprocal influence of GRESB and sustainable reporting in the private sector is likely to increase in the coming years. With increasing requirements for net zero and circular models in the construction industry, I assume that development portfolios will also be evaluated more frequently in the future.
However, we can see that the GRESB submission is very time-consuming. Not everyone wants to or can afford it. This is why new vessels and dedicated labels for evaluating the ESG performance of real estate are constantly being created regionally. It is important to carefully weigh up which certificate and rating suits the investment strategy and the real estate portfolio.
pom+Consulting Ltd. initiated the sustainable transformation of the property industry almost 15 years ago - out of conviction. Our expertise dates back to 2011, when we developed the first sustainability check for portfolio holders and, together with KBOB and the Interessengemeinschaft privater professioneller Bauherren (IPB), published a highly regarded guide to sustainable property management. Today, we support numerous companies throughout Switzerland and Germany on their path to climate neutrality.
pom+ is an official GRESB partner. Learn more about our GRESB services here.