Summary
- ESG has moved from a nice-to-have to an integral part of a responsible fiduciary
- COVID-19 will necessarily cause setbacks in ESG goals
- Owners and asset managers can benefit from more effective communication about the drivers of ESG metrics and their strategy going forward
Even five years ago, ESG programs were nice-to-haves. They were primarily seen as marketing tactics that were worth the reduction in returns.
Times have changed however, ESG programs have reached a tipping point and are now seen as integral to being a responsible fiduciary. The business case has been settled: robust and well-executed ESG programs protect and enhance returns.
Unfortunately, COVID-19 has created significant headwinds to the progress that’s been made.
Many commercial assets are designed to operate with about 20% outdoor air and 80% recirculated air in the building. This promotes efficiency because outdoor air is much more expensive to heat or cool than recirculated air.
Now, buildings are expected to forgo those efficiency gains by significantly increasing the outdoor air mix to flush out droplets and aerosols potentially carrying COVID-19.
While the exact increase in costs for this change depends on the size of the building, HVAC configuration, climate, and other factors, the financial and ESG costs are often significant.
In one example pulling from Enertiv’s dataset, increasing outdoor air mix from 20% to just 30% caused HVAC costs to shoot up by 14% despite temperature staying within a narrow band. ASHRAE and CDC are recommending increasing outdoor air all the way to 100%!
Simply put, necessary changes can wipe out a significant portion of gains made over the last few years.
Accepting these setbacks as an inescapable fact, how can owners and asset managers effectively communicate their updated strategy to investors and instill confidence that prioritizing ESG will once again align with maximizing returns?
The Fundamentals of ESG Data
One of the most powerful impacts of the proliferation of ESG programs has been the move from “decals to data.” Instead of getting caught in the black-and-white world of certifications, data has provided nuance and defensibility on an ongoing basis.
The infrastructure for basic ESG reporting is relatively easy to put in place. Within weeks, entire portfolios can be setup to report across a number of relevant metrics:
- Carbon Emissions
- Carbon Reductions (Actual, Projected, Target)
- Total Energy Usage
- Energy Spend
- Total Water Usage
- Water Spend
- Total Waste Output (US ton)
- Disposal Output
- Recycling Output
- Total Spend
Many portfolios already have the capabilities and are reporting on these metrics regularly. This data provides the foundation to monitor performance across all assets, provide transparency to investors, inform decision making, and submit information to standardized benchmarking organizations such as GRESB.
Asset-level Initiatives
Unfortunately, ESG programs have achieved scale without granularity. As such, the most specific data available for reporting purposes has been limited to the building level.
In challenging times, when targets are expected to be missed, it’s only natural for reporting on the “what” to give way to questions about the “why.”
To answer the why, data needs to be collected from the individual sources that drive those building-level KPIs.
This is where most owners and asset managers lose interest or give up. The mere mention of the word “operations” almost immediately causes eyes to glaze over.
No doubt, building operations can get unbelievably complicated and should be left up to skilled engineers.
Still, learning about a few key concepts can dramatically improve communication about ESG to investors.
Tenant vs Base Building
The first key concept to understand is the breakdown between tenant and base building usage. Obviously, this will depend on lease structures, but in general, tenant activity is usually responsible for around 70% of the overall utility bill.
Changing tenant behavior, especially in the middle of a global pandemic, is very difficult to achieve. But there is a simple strategy that owners can implement to promote tenant responsibility in the process of improving routine workflows on site.
That is digitizing tenant submeter readings and billing. By digitizing the data collection process, tenants can be provided portals to track their usage and their costs while they pay their bills. This is a best practice and should be part of an enhanced ESG program.
Sources of Granular Data
Without getting too specific, there are two primary options for capturing granular data for the base building equipment that drives the other 30% of the utility bill.
The first is from building management systems (BMS), which are likely utilized in many of the modern and trophy buildings in the portfolio.
Because BMS control the HVAC and other systems on site, they are usually not connected to the internet for security reasons. Still, getting the data out is relatively straightforward in most cases and can be achieved with one “data logger” device.
The downside is that every manufacturer has their own ways of categorizing the data, which makes the backend process of cleaning the data more difficult and less scalable.
The other option for capturing this data is with equipment monitoring. This will be necessary for any buildings that do not have a BMS (generally Class B and C offices, industrial, multifamily) and to supplement the BMS in some cases.
This is achieved with sensors installed in the building. While there’s more upfront work necessary, the data is standardized from the minute it begins flowing out of the building.
Ultimately, a portfolio approach to granular building data will likely require a combination of these approaches. In either scenario, this data is used to identify wasteful practices (such as heating when it’s hot outside) and to be more data-driven with capital investments.
What matters for most owners and operators is the return on investment. On an annualized basis, it’s safe to assume a 250-450% ROI, with costs somewhere around 5 to 15 cents per square foot and increases of NOI of 25 to 45 cents per square foot.
Conclusion
When push comes to shove, here’s what should be communicated when questions about the ESG strategy given COVID-19:
“We are in the process of collecting better data using low-cost digitization and sensor strategies across the portfolio. Soon, we will be able to report on individual tenant consumption as well as each of the systems that contribute our overall key performance indicators. This data will provide tenants with the transparency they need to change behavior and building operators with the insights to reduce waste and balance COVID-19 mitigation with ESG goals.”
Of course, communication is only the first step. The next step is to make this happen. The market is speaking, now is the time to listen and act.
Looking to step up your ESG game? Schedule a demo today to see if our solutions are right for you!
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