Global Real Estate Sustainability Benchmark – or “GRESB” as it is commonly known – is emerging as the leading way for the commercial real estate industry to report sustainability performance on a portfolio basis. It is an annual survey of environmental, social, and governance (“ESG”) data that is evaluated on year-over-year performance and then ranked against the organization’s peers. GRESB is different than standards like LEED and Energy Star that look at the environmental design and performance of individual buildings. With GRESB, sustainability is pushed beyond individual assets up to the portfolio level. The goal of GRESB is to establish standards for collecting and reporting investment grade ESG data that companies and investors can use as a performance indicator for commercial real estate portfolios. According to researchers, green buildings mean lower risk and higher returns for investors. P. Eichholtz, N. Kok and J. Quigley, The Economics of Green Building, 95 The Rev. of Econ. & Stat., 50-63 (2013). The fundamental idea is that this concept holds true on a portfolio level, and GRESB quantifies ESG data, giving investors a reliable means to evaluate ESG performance. In essence, a high GRESB ranking is a theoretical proxy for overall business health and a signal for better long-term financial performance of a portfolio. The GRESB survey collects and synthesizes a large amount of data on energy, water, greenhouse gases, waste, social responsibility, ethics, and governance. Gathering the data needed to complete the survey can be a difficult challenge, even for well-organized property managers. The data requested is not always collected in the normal course of business, and even if it is, it might need to be verified, parsed or aggregated to provide accurate responses to the GRESB survey prompts. As an additional wrinkle, GRESB is designed for real estate portfolios around the world, and some of its definitions and survey questions do not quite fit the regulatory frameworks and business models used commonly in the U.S. Understanding a little about the way the GRESB survey is evaluated can help an organization achieve better rankings or explain an apparent drop in its performance. First, the more complete an organization’s data, the better its GRESB score will likely be. (As a result, smaller portfolios with fewer assets and more complete data sets tend to have better GRESB rankings.) To improve an organization’s GRESB ranking, make it a goal to consistently and uniformly collect data for all assets on energy usage, water consumption, greenhouse gas emissions, and waste generation and diversion. Counsel can help in this effort by making data collection an integral part of all leases (even triple net leases) and service contracts. These agreements can be drafted to require or incentivize data collection and annual reporting synchronized with the GRESB reporting period selected (either a calendar year or a fiscal year) by the reporting organization. The lowest hanging fruit for data collection is energy data, and one efficient way to capture it is to require or incentivize tenants to use (and give landlord access to) the EPA’s Energy Star Portfolio Manager, the most widely used benchmarking tool for energy performance. This free tool, available on the EPA’s website, easily tracks performance using monthly utility data. In situations where Energy Star Portfolio Manager is not appropriate, consider requiring tenants to collect energy usage data using the ASTM Standard Practice for Building Energy Performance Assessment for a Building Involved in a Real Estate Transaction (E 2797-11) as a guide. This standard provides a framework for collecting energy performance data, but this is just a methodology for collecting data, not a streamlined data collection system like the EPA’s online tool. Second, an organization can improve its GRESB score by intentionally putting inefficient assets into GRESB’s “indirectly managed” category. The ultimate goal of GRESB is improved ESG performance, and driving ESG improvement is easier for properties under the landlord’s operational control than it is for properties under tenant operational control. Acknowledging this challenge, GRESB distinguishes between directly and indirectly managed assets, with indirectly managed assets being given less weight. This means that shifting an underperforming asset into the indirectly managed category will improve an organization’s GRESB score. Under the GRESB definitions, the categorization of an individual asset turns on whether “the single tenant . . . [has] the ability to introduce and implement operating and/or environmental policies and measures.” 2016 GRESB Real Estate Assessment Reference Guide. Thus, during the leasing process counsel should consider which category the organization wants the asset to fall into and weigh this along with other business considerations in the negotiations.Third, GRESB focuses on year-over-year performance. Each year, more is required to achieve a comparable score. This means that it is important to keep track of what and how data were reported. If an organization reported a data point one year and fails to do so in a subsequent year, its GRESB score will suffer. This also means that a significant change in use from something with a low energy usage (office space) to something with higher energy usage (restaurant space) will have a negative impact on the score. In addition to helping an organization achieve a better GRESB score, counsel should also keep a close eye on the survey responses related to renewable energy to avoid the risk of breaching a renewable energy contract and/or making inaccurate claims. The GRESB survey asks detailed questions about onsite generation and consumption of renewable energy. The wording of the survey does not fit the regulatory frameworks and business models common in the U.S. Many states incentivize renewable energy by creating a market for renewable energy credits. Renewable energy credits, called different things by different states, are a regulatory fiction that separate (or unbundle) electricity from the fact that the electricity was generated from a renewable energy source. States create this regulatory fiction to make a societal good – the fact of renewable generation – a tradable commodity. For example, this means a solar system produces electricity and renewable energy credits. These are two distinct assets that can be sold or consumed separately. This regulatory fiction is particularly hard for some people to grasp, including some people filling out the GRESB survey. If the organization has onsite renewables but does not own and retire the renewable energy credits, it cannot count the energy generated by the system in its renewable energy tally for GRESB. Doing otherwise, would likely put the organization in breach of its renewable energy agreements and at risk for claims of misrepresentation, which is a particular concern since one of the primary purposes of the GRESB assessment is to report ESG performance to investors.Counsel should pay equally close attention to the GRESB survey responses related to carbon offsets, another regulatory fiction that is easily misunderstood and misreported. Carbon offsets commoditize the greenhouse gas abatement (or carbon sequestration) resulting from a specific greenhouse gas emissions reduction project. One carbon offset generally represents the removal of one metric ton of carbon dioxide equivalent from the atmosphere. Like renewable energy credits, the idea is to turn a societal good – here the reduction of greenhouse gases in the atmosphere – into a tradable commodity. Unlike many nations, the U.S. does not have a common standard for measuring and verifying carbon offsets. This means that not all carbon offsets on the market are created equal. Buyer – and GREBS reporter – beware. Counsel should also be mindful of the reasons why the organization is buying carbon offsets. Some organizations, usually heavy emitters of greenhouse gases, buy carbon offsets to comply with governmental regulations. Others buy them voluntarily to reduce their carbon footprint. The motivation for a carbon offset purchase should be well understood to make sure that the carbon offsets have not been used for a purpose that prohibits their use in environmental performance reporting. This caution is particularly important for organizations that are legally obligated to purchase carbon offsets. Also, an organization could improve its GRESB ranking by qualifying its energy efficiency retrofits and weatherization projects to generate carbon offsets. The Verified Carbon Standard (VCS) methodology VM0008 provides one way to turn these types of capital improvement projects into a source of carbon offsets. The generated carbon offsets could be sold or they could be retired by the organization to offset its own emissions. Of course, like renewable energy credits, carbon offsets cannot be included in a tally for GRESB unless the organization owns and retires the carbon credits during the reporting period. In the years to come property companies and funds will likely receive more and more pressure to report on ESG performance, and GRESB appears to be emerging as the industry standard. Even with these pressures to participate, the decision to join GRESB should not be taken lightly. It takes a lot of work just to complete the survey, and doing sustainability well across a portfolio – and receiving a good GRESB ranking – takes not only the commitment of the leadership, but also strategic thinking by counsel.
Tricia J. Sadd, Esq. is a partner with Montgomery McCracken Walker & Rhoads LLP.