3 Ways ESG Reporting Leads to Better Financial Performance

ESG (environmental, social and governance) reporting is getting a lot of focus in commercial real estate circles these days.

No doubt, some of the focus is driven by genuine altruism from owners and operators, but likely a bigger factor is that portfolios are finding that they can’t compete for capital without a strong ESG program in place.

But what is motivating lenders and investors to require ESG disclosure? Surely, the threat of climate change, changing social standards, and a spotlight on inequities play a role. 

Why now though? These issues have been around for a long time. The reason ESG disclosure is now required is due to the emerging body of knowledge that shows a positive correlation between ESG and financial performance. 

But how?

A cursory look at the messaging from ESG frameworks and software companies that streamline reporting offers some abstract ways that reporting might lead to better outcomes.

Things like “ESG fosters cleaner and more efficient practices that drive down your company’s operating costs and environmental footprint” or “ESG’s roots in proactiveness and risk management produce the structures and systems in place to handle risks.”

It makes sense conceptually, but the specifics are vague. Here are three legitimate ways that ESG reporting leads to better financial performance.

Tenant-Level Analytics

Energy consumption is a key metric in ESG reporting. If one portfolio’s buildings consume less energy than a portfolio of similar assets, it will be rewarded with a better score and therefore access to capital and better PR (in addition to lower operating expenses and fulfilling altruistic aims).

But how do you consume less energy?

There are certain areas within the control of operators. Purchasing more efficient boilers and chiller plants, operating tight schedules and temperature settings, ensuring that maintenance is performed regularly so that equipment runs as intended all lower consumption.

But after all of this, most commercial landlords only directly control around 70% of their building’s utilities. The rest is controlled by the tenants.

That’s why reporting frameworks such as GRESB now require that performance indicators, including energy, water, GHG emissions, and waste must be monitored and reported in both landlord and tenant-controlled spaces.

Whether it’s fair or not, landlords have to start capturing and reporting on tenant consumption. Fortunately, while tenant behavior can’t be controlled, it can be influenced. 

Many portfolios, particularly office and retail, have been submetering their tenants for years or decades. However, the current process is a missed opportunity to engage tenants and give them the tools they need to support performance goals.

Instead of attaching a difficult-to-understand submeter bill on the end of monthly rent, software can be used to generate highly interactive bills with benchmarking, comparisons, gamification and a translation to environmental impact of consumption. 

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Mike McNamara

Mike McNamara

A Las Vegas Realtor since 2008. Mike has a wide range of knowledge around all things Las Vegas.

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