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Real estate heavyweights line up behind sustainability score

Several major commercial real estate players have thrown their weight behind a common set of environmental sustainability metrics, raising hopes of consensus even as a handful of prominent pension funds push companies for even deeper disclosures.

An alphabet soup of third-party services has emerged in recent years to evaluate real estate companies' sustainability, and industry participants say it can be difficult to know which metrics, and which scorekeepers, are most important. Still, powerful industry groups, including the National Association of Real Estate Investment Trusts and the Pension Real Estate Association, have aligned with one firm: the Global Real Estate Sustainability Benchmark, or GRESB.

The privately owned firm, a subsidiary of a nonprofit corporation called Green Business Certification Inc., was founded in 2009 by three pension funds and academics from the University of California at Berkeley and the Netherlands' Maastricht University. GRESB scores real estate portfolios and companies against their peers, on environmental sustainability and other social and governance factors, on a scale of 1 to 100. Aside from disclosing which companies are ranked No. 1 in various slices of the industry, GRESB provides scores only to paid subscribers.

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Participation in the rankings is voluntary, and many REITs — NAREIT members — have so far opted out. Still, some large investors, including Dutch pension funds Stichting Pensioenfonds ABP and PGGM, lean on companies they invest in to submit data for GRESB scoring. ABP, one of the largest investors in publicly traded U.S. REITs, says it is "encouraging" real estate funds to undergo GRESB assessments, while requiring new portfolio investments to participate.

Norges Bank Investment Management, which manages Norwegian pension fund money, declined to comment on its policies for investing in companies, but said it uses GRESB to assess the sustainability of its wholly owned properties and expects its real estate partners and asset managers to be "open, responsive and proactive" in pursuing and demonstrating improvement. Some large U.S. investors have also come on board: CalPERS, which manages California employees' pension funds, expanded its use of GRESB assessments in 2017, and a BlackRock Inc. executive said it is investigating ways to better incorporate the firm's data.

GRESB executives say both industry participation and participating property owners' average scores have risen in recent years, and a spirit of competitiveness for higher scores has developed between some companies that are scored against each other.

Even so, Hans Op 't Veld, head of listed real estate at PGGM, described GRESB as a means to an end — globally consistent data disclosure, from which interested parties can make their own assessments — that can still feel far off.

"We initiated GRESB because we felt that there was not sufficient information around," Op 't Veld said in an interview. "Ideally, I think that GRESB is only a band-aid to the issue of not having enough information. I'd much rather have the companies putting out the information themselves."

Range of approaches

Though industry participants say the conversation about green real estate has accelerated in recent years, public REIT investors still pay varying amounts of attention to sustainability.

In a conference appearance, David Stanford, founder of the professional services advisory firm RealFoundations, noted that while most sustainability measures are based on past performance, real estate valuations are typically based on future income — making it hard for property owners to get credit in valuations for sustainability investments that have yet to pay off.

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John Thomas, president and CEO of Physicians Realty Trust, an owner of medical office buildings with a roughly $3.30 billion market cap, said a major pension fund investor asked the company to submit data to GRESB and said company leadership will consider such a move as the REIT grows larger and has more resources to devote to sustainability.

REIT executives reported a range of approaches. H. Eric Bolton Jr., chairman, president and CEO of Mid-America Apartment Communities Inc., a multifamily owner with a roughly $11.64 billion market capitalization, called environmental, social and governance issues a "growing area of emphasis by the capital markets" and said the company is studying ways to initiate a formal monitoring and reporting program. He added that Mid-America is not yet participating in GRESB evaluations.

Rick Matros, the chairman, president and CEO of the roughly $3.43 billion-market-cap Sabra Health Care REIT Inc., said in an email that the company, which owns nursing homes and other healthcare properties, has been largely unaffected by the sustainability conversation. He said no investors have raised the issue, and he added that because most of Sabra's properties are under triple-net leases — in which renters are responsible for paying most property-level expenses — the question of future environmental initiatives is largely up to the company's tenants.

Investors are grappling with how to use the data that is currently available. Sherry Rexroad, the chief investment officer of BlackRock Global Real Estate Securities, said the firm is working to incorporate risk associated with environmental factors into its system for assessing property valuation and projecting cash flows. Asked in a February interview with NAREIT which method of ESG data collection she prefers, though, she said: "That's the problem ... I really can't find the right data source."

While BlackRock views GRESB as the most reliable sustainability data provider, BlackRock receives reports from many other providers, some of which do not check their metrics with the property owners themselves.

"I think it's a huge opportunity for investors and the companies to come together and try and create a more unified template for data collection," Rexroad said. "Most of all, as an investor, I don't want companies wasting resources reporting the same thing in a variety of ways."

Benefits tangible and otherwise

When Equity Residential first opted to submit data to GRESB for assessment, it was largely because a few investors asked it to, Lou Schotsky, the company's first vice president of investments, said in a panel appearance.

One was Hans Op 't Veld, who said PGGM pushes sustainability disclosure in part because it is concerned that energy-inefficient properties could become obsolete within a few years.

Schotsky, whose company is the largest U.S. multifamily REIT, with a market cap of roughly $24.03 billion, expressed a similar concern. In the type of decades-old wood-frame suburban apartment buildings that are common in much of the industry, he said, "you can just feel the rent dropping as you walk across the floorboards."

The company, which has a team of employees working on sustainability projects, now posts strong GRESB scores and was named the firm's global residential listed sector leader for 2017. Still, while Schotsky emphasized Equity Residential's range of ongoing sustainability projects generating strong economic returns, he said it remains unclear how investors use much of the data the company discloses.

That is partly the nature of investment management, he said: "You're not going to engage every investor in the same way around it, because their hypotheses about where and how that information should bake into their thinking are going to vary quite a bit."

Schotsky said the company is not overly focused on its GRESB ranking as such. Yet, he added: "Having a public score, you don't want to be on the bottom of the list. And if you could just bring the bottom quartile up, that's way more important and valuable to shareholders and communities and the environment at large than who gets first, second or third."