How much does it cost to heat and cool the globe’s millions of office buildings and other commercial structures? A lot more than it should, as it turns out.
A majority of such buildings waste from 10% to 30% of their energy output, according to Logan Soya, founder of Aquicore, considered to be the leading provider of ESG analytics software for commercial real estate.
The waste puts the real estate industry front and center in the accelerating environmental, social, and governance (ESG) movement, whose critical eye focuses most intensely on corporate issues related to the environment.
In fact, casual observers who perceive the automotive industry as dwarfing other sources of carbon emissions might be surprised to learn that commercial real estate generates 39% of the global emissions total. It is, after all, a $30 trillion worldwide industry annually.
That means Aquicore, as well as other players in the ESG field, is at the cusp of a huge challenge, but also a huge opportunity. The company’s mission is to help its clients — mostly large commercial real estate firms — become more aware of environmental, social, and governance issues, ensure their compliance with ESG regulations in the jurisdictions where they do business, and identify and adhere to best practices.
As CFO noted previously, a major issue with ESG adoption generally is how to account on financial statements for the nonfinancial data that ESG efforts generate. If a workable solution is found, companies then must prioritize getting stakeholders’ buy-in to the presentation — another arduous task.
A group at Harvard University is working to develop what it hopes will become a standardized accounting system. It’s being designed to ascribe monetary values to ESG factors, as well as reward ESG successes and create consequences for ESG transgressions. The work is of paramount importance to companies’ ongoing (if slow-moving) adoption of ESG principles, says Ronald Cohen, a Harvard professor who chairs the Impact Weighted Accounts Initiative.
“Institutional real estate is experiencing a major global shift, bringing heightened focus to ESG-oriented issues.” — Dan Winters, GRESB’s senior director
However, the project is expected to be difficult and lengthy. That’s a key reason Aquicore, in a bid to start moving the needle sooner on ESG adoption, in May aligned with the Global Real Estate Sustainability Benchmark Initiative. The nonprofit, investor-led organization collects, validates, scores, and benchmarks ESG data that it packages in business intelligence and engagement tools. Launched in 2009, GRESB later expanded its purview to include infrastructure such as roads, railways, and the electricity grid.
The partnership will empower companies to leverage data and analytics to make buildings more sustainable and resilient while reducing operating costs, says Dan Winters, GRESB’s senior director. “Institutional real estate is experiencing a major global shift, bringing heightened focus to ESG-oriented issues — especially to energy efficiency, carbon reductions, and climate readiness.”
Appeasing Investors and Regulators
Commercial real estate investors are increasingly taking ESG into account as they confront financial risks associated with ESG factors, especially climate change. Real estate firms are facing demands from investors who want to understand the exposure of companies with large real estate holdings to, for example, flooding and the increasing prevalence and severity of adverse weather events.
By partnering with GRESB, Aquicore expects to help improve industrywide ESG databases that can be used to benchmark the performance of individual commercial real estate companies. That would allow for at least some degree of comparison among them.
“I would consider real estate a leader in ESG compliance and participation relative to other industries.” — Logan Soya, founder of Aquicore
Soya, for his part, is more than satisfied with Aquicore’s growth. In 2021, he claims, the firm helped its clients — which include real estate heavyweights Tishman Speyer, CBRE, and JLL — save 33 million kilowatt-hours of energy usage and 23 million kilograms of carbon. “I would consider real estate a leader in ESG compliance and participation relative to other industries,” Soya says.
One reason for that: commercial real estate leaders are under pressure to get ESG-compliant from regulatory authorities, Soya notes.
“Real estate definitely feels the pressure as a targeted industry,” he says. “It’s facing scrutiny right now from a reputational perspective and also because of how much influence it has on overall carbon emissions.”
As a result, most top real estate firms have already adopted some form of ESG disclosure. Most also have made some type of public sustainability pledge, such as setting a goal for 50% carbon reduction by 2030, according to Soya.
Another important reason commercial real estate may be ahead of the pack, Soya says, is that it’s among the first industries in which ESG has tangibly started to affect corporate performance. In Europe, for example, some building owners are being socked with valuation discounts of 10% to 30% if they don’t have a credible decarbonization forecast in their financial statements.
“Real estate already has some trained ESG veterans, while other industries are scrambling to educate and train talent for this new discipline,” says Soya. The Big Four accounting firms, for example, all have said they are spending billions to train employees in ESG.
“Real estate has already been doing a number of sustainability-related activities and energy management, like upgrading buildings’ lighting from incandescent to LEDs for ROI purposes,” he adds. “So while these activities have not necessarily always been top priority, they have created skilled people who understand what ESG is and how to implement it.”
There have been many efforts to reform corporations over the years, with the underpinning that they affect almost all of the world’s population in myriad ways. For example, stakeholder capitalism, a 1970s reform movement out of which ESG grew, went virtually unnoticed by the general public.
But the ESG movement feels more like Theodore Roosevelt’s highly successful “trust busting” efforts in the early 20th century. Trust busting was successful because it had the public’s overwhelming support — just as ESG does now.