In recent years, the concept of Environmental, Social, and Governance (ESG) has gained significant traction in the real estate sector, with stakeholders increasingly demanding transparency and accountability from organisations. As a result, commercial property owners in the UK are under growing pressure to demonstrate their commitment to sustainable practices and responsible investment.
To navigate this evolving landscape, commercial property owners need to embrace robust ESG reporting frameworks that provide clear guidelines for measuring and disclosing their ESG performance. This article aims to shed light on three key ESG reporting frameworks – Task Force on Climate-related Financial Disclosures (TCFD), Sustainability Accounting Standards Board (SASB), and Carbon Disclosure Project (CDP) – and how they can empower commercial property owners to enhance their sustainability efforts and engage with stakeholders effectively.
What is ESG in commercial real estate?
Given the built environment accounts for 40% of annual CO2 emissions, the concept of ESG is highly applicable to and relevant in the commercial property sector. Here’s a breakdown of how ESG can be applied in commercial real estate:
- Environmental: When it comes to real estate, this primarily focuses on the energy efficiency and emissions of buildings, which are increasingly determined and assessed against “green” rating systems such as BREEAM, LEED, NABERS, Green Star and GRESB. Embracing ESG principles in commercial real estate includes adopting energy-efficient technologies, optimising water usage, incorporating renewable energy sources, reducing waste and managing carbon emissions.
- Social: In real estate terms, this focuses on a building’s impact on the surrounding communities, tenants and employees. It involves creating safe, healthy and inclusive spaces that enhance the wellbeing of occupants. Socially responsible property owners prioritise factors such as indoor air quality, occupant health and safety, accessibility, diversity and inclusion, community engagement and stakeholder involvement.
- Governance: The governance aspect of ESG in the commercial property sector pertains to the leadership, management and transparency of property owners. Good governance practices include strong oversight, transparent decision-making processes and accountability. Effective governance frameworks encompass risk management, compliance with regulations and adherence to ethical standards.
ESG standards and frameworks
Task Force on Climate-related Financial Disclosures (TCFD)
The TCFD framework was established by the Financial Stability Board to improve and increase reporting of climate-related financial information. The recommendations in the framework focus on voluntary disclosure of climate related financial information in the areas of governance, strategy, risk management and metrics and targets. In particular, the recommended disclosures are used to report on climate-related risks and opportunities as well as scenario analysis. Both of these are aimed to help lenders, insurers and investors make more informed decisions based on a company’s resilience to climate change.
Equally, the framework encourages reporting companies to identify risks, better understand future climate scenarios and create robust strategies for adaptation. In the commercial real estate sector, TCFD reporting allows property owners to better understand the potential impacts of climate change on their assets, develop appropriate risk management strategies and communicate their climate-related actions to investors, lenders and insurers.
Since April 2022, over 1,300 of the largest UK-registered companies and financial institutions have been required to disclose climate-related financial information in line with TCFD recommendations on a mandatory basis. And by 2025, it will be mandatory for all organisations in the UK to align their financial risk disclosed to TCFD recommendations.
Sustainability Accounting Standards Board (SASB)
SASB is an independent non-profit organisation which provides sustainability accounting standards that identify sustainability issues that may impact financial performance and enterprise value for companies across 77 industries. SASB’s industry specific standards include 6 disclosure topics and 13 accounting metrics across five key dimensions of sustainability – environment, social capital, human capital, business model and innovation, and leadership and governance.
Including a “Real estate owners, developers and investment trusts” industry, SASB accounting enables commercial property owners to communicate their performance on key issues such as energy efficiency, indoor air quality, tenant health and safety and community engagement.Adopting SASB standards ensures a standardised and comparable approach to ESG reporting, facilitating benchmarking and informed decision making for investors and stakeholders.
The purpose of sustainability accounting is to provide material information to institutional investors to enable them to evaluate the performance of companies through an ESG lens. It provides a complete view of a corporation’s performance by integrating financial and sustainability information so that they can be evaluated side by side.
SASB standards work in tandem with the TCFD recommendations, by providing an industry-specific set of climate-related disclosure topics and metrics to help companies more effectively implement TCFD recommendations. While the SASB standards centre on the disclosure of industry-specific, financially material ESG information, the TCFD recommendations lean towards addressing climate-related risks and opportunities. Thus, by using a combination of SASB and TCFD, companies can provide capital markets with comprehensive sustainability-related financial disclosure.
Carbon Disclosure Project (CDP)
CDP is an international non-profit based in the UK, Germany and the US that runs a global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts. CDP provides questionnaires for companies, cities, states and regions to report on up to three of the following sustainability categories – climate change, forests and water. Updated annually, the questionnaires are aimed at providing qualitative and quantitative information to participants’ stakeholders covering governance, policy, risk and opportunity management, environmental targets and strategy, as well as climate related scenario analysis.
As a globally recognised platform, CDP is an effective way for commercial property owners to develop an ESG strategy, by reporting and managing their environmental impacts (particularly in the areas of carbon emissions and climate-related risks). By participating in the CDP questionnaire, property owners can measure, disclose and set targets for reducing their carbon footprint. This data-driven approach helps drive energy efficiency, climate resilience and responsible resource consumption, while also enhancing credibility and transparency in the eyes of investors, tenants and the wider public.
How to select the right framework
When choosing a framework to report ESG performance, property owners should consider their individual organisation’s goals and objectives in terms of sustainability and ESG reporting. For example, if carbon reduction is a primary objective, the CDP framework may be particularly relevant, as it focuses on measuring and disclosing carbon emissions. On the other hand, if climate-related risks and opportunities are a top priority, TCFD reporting may offer a more comprehensive approach to managing and disclosing climate-related information.
Property owners should also identify the expectations of their stakeholders, including investors, tenants, regulatory bodies and industry associations. By engaging in dialogues with these stakeholders, owners can gain a better understanding of their ESG reporting preferences and requirements, to ensure their organisation’s ESG strategy aligns with the goals of the stakeholders it ultimately affects. Owners also use different frameworks and standards in tandem, as building blocks to develop a system of disclosure tailored to the unique needs of their stakeholders.
The most important thing to remember when it comes to ESG reporting is that it must not be treated as a standalone exercise, and instead must be incorporated into an overall sustainability strategy. By integrating ESG reporting into their broader sustainability framework, commercial property owners can align their ESG initiatives with their business objectives, track progress, strengthen stakeholder relationships and identify synergies between different sustainability initiatives.
Building analytics software and ESG compliance
Building analytics software, such as CIM’s innovative PEAK Platform, can play a crucial role in supporting ESG compliance in the commercial real estate sector. With a growing emphasis on sustainability and ESG reporting, these software solutions provide valuable insights and data-driven tools to monitor, measure and optimise the environmental performance of buildings. By integrating building analytics software into their ESG strategy, property owners can track energy consumption, water usage, indoor air quality, waste management and other key sustainability metrics in real-time. This allows for proactive identification of areas for improvement, implementation of energy-saving measures and evidence-based reporting for ESG compliance.