Conquering What Makes an ESG Strategy Hard for Multifamily

Establishing a company-wide ESG (environmental, social and governance) strategy and overcoming external and internal obstacles is a white-hot topic in multifamily. The attention is trickling down from portfolio investors to the property level at an increasing rate.

The ESG issue has spawned lots of questions lately, as regulators talk about releasing formal plans for new reporting guidelines in early 2022.

To understand the importance of ESG and how to tackle it, operators must first realize why property management investors are so focused on the issue.

According to a recent Harvard survey, sophisticated investors say that factoring ESG information into decisions about where to put their money is important because it affects investment performance. ESG is believed to provide information primarily about risk and strategic return potential rather than a company’s competitive position.

Reasons the majority of respondents believe non-financial information is material to investment decision-making include:

• The effects on a company’s reputation and brand
• Exposure to potential threats of litigation and regulatory intervention
• Signaling of a company’s long-term approach to business strategy

Just as these reasons resonate with investors, they are also relevant to property owners and operators. The significance of ESG to a portfolio is that sustainable practices make great, lasting value because they improve performance, thereby boosting asset value.

Yet it can be hard to grasp at the property level, the true foundation for ESG strategy and tactics.

An effective plan must have buy-in from top to bottom, and performance is based on setting goals, benchmarking and then constantly measuring individual assets in a portfolio. For rental property owners and operators, realizing the performance of a particular asset within a portfolio can mean the seemingly arduous, time-consuming and frequent task of manually chasing down a significant amount of operational information for ESG reporting. Sometimes it is not all there.

The process becomes further complicated by high staff turnover rates and inevitable day-to-day interruptions that make it difficult to deliver the data as mandated by investors, government agencies or finance partners, such as HUD and FHA.

And when gathering whole-building utility data looks like a jigsaw puzzle, the ESG picture may be left with blank spots. Swiss cheese building and operational data won’t cut it in today’s marketplace.

The journey of constant improvement

In recent years, ESG’s focus has shifted its processes from its origins in the assessment and tracking of high-level financials to include non-financial aspects. Buildings are viewed essentially as businesses within businesses, and operational aspects such as utility consumption weigh heavier on assessments.

GRESB, for example, is the global standard for benchmarking investment portfolios. The member-based organization has evolved and grown in the same way ESG urgency has, and is trusted by 140 institutional investors and more than 2,200 fund managers, companies and asset operators to help investors make better decisions.

GRESB now rates and scores portfolio performance based on a standardized peer benchmark.

“Simply put, what you measure, you improve,” says Dan Winters, Head of the Americas for GRESB.

“We categorize the leaders and highlight what they are doing,” he adds. “Annual benchmarking shows that ESG-based metrics are possible to track and market context creates a competitive race to the top.”

A sense of urgency

The heat is on for the real estate industry to achieve more sustainability and greater asset value. There’s a clear mission to make properties perform better environmentally, deliver more social value throughout operations and supply chains and communicate quantifiable and constantly-improving results.

In multifamily, urgency has mounted to strategically and thoroughly assess as much about an apartment building as possible.

“Investor focus has expanded beyond the rent roll,” Winters says. “That’s why all of a sudden non-financial measures are white-hot.”

The uniqueness of apartment buildings and automating the business intelligence around multifamily properties is particularly challenging when trying to gather whole-building data.

GRESB strives to compare apples-to-apples consumption and performance data, including whole-building actuals (not estimates) in real time for high-rise, mid-rise, low-rise and garden style apartments.

However, it’s not always a slam dunk.

“You don’t always have easy access to the numbers and metrics to provide investors,” Winters says. “Environmental, social, sustainability − few firms systematically tracked those types of metrics before. Rather, they’ve been tracking just the financial performance.”

Start with a silo-busting ESG strategy

Sustainability seeps into many aspects of multifamily operations and can easily be overlooked in appraising how well an organization is being run.

It’s important to have a silo-busting approach when formulating an ESG plan, Winters says. In the first year of an ESG strategy, portfolios need to discuss with property managers how to elevate energy, water and waste measures.

But most portfolios aren’t set up with a system or sustainability team to manage ESG reporting. For an organization that wants to take the plunge, Winters suggests assigning one person to head the effort and allowing time to research a proper ESG strategy. He has seen some portfolios nurture a fully knowledgeable ESG expert who directs and implements a range of sustainability initiatives.

“Your first year, you need a passionate associate who can rouse your organization to gather information and deliver what you need,” Winters explains. “The initial exercise is an opportunity for your entire organization to learn a great deal about its operations, its impacts and why residents and investors care so much about becoming sustainable.”

Focus on managing physical and transitional risk

Beyond the basics, advancing an ESG strategy requires identifying transitional and physical risks, then determining better ways to manage both.

With transitional risk, portfolios must determine their level of exposure to carbon-based inputs, and realize that inefficient assets will become more economically disadvantaged over time. When they become inefficient, operational costs escalate, potentially to a point that a property’s expenses – such as high energy usage, water leaks and waste, or too much trash hauled to landfills -- have a significant negative impact to resident and community health, wealth and longevity.

Assessing climate mitigation potentials for each building and property will go a long way toward uncovering any issues that will become bumps and bruises down the road.

“You want knowledge of these issues now,” Winters says. “Nobody likes surprises.”

Physical risks from climate change and its potential destructive effects – with increasing impacts from hurricanes, floods, fire, and tornados – affect not only the buildings and grounds, but residents as well. For geographically concentrated portfolios in vulnerable areas, the potential for physical damage may be more acute than for national portfolios with varying climate issues across multiple regions or countries.

Understanding the physical risks of assets and formulating recovery plans is prudent ESG management.

“If you’re an institutional investor with positions in 100 different companies diversified throughout the globe, you focus in on unintended concentrations of physical risk, many you may not be aware of,” Winters says. “Identifying and tracking transitional and physical risks is what investors are really starting to focus on, and they’re pushing these questions down all the way to asset level.”

Winters says ESG reporting will continue to evolve, requiring property professionals to hurdle information barriers that await. But change isn’t new – success comes down to staying focused on every aspect of the business to ensure a sustainable future.

“These issues are increasingly complex,” Winters concludes. “The industry is collectively focused on how we make progress sooner versus waiting for risks to increase even more.”

For many, getting started is taking that first step in ESG implementation.

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