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How ESG Has Democratized Sustainability in Commercial Real Estate

In 2008, not long after Measurabl’s founder and CEO Matt Ellis got his start in the commercial real estate industry, he showed his manager an investor report from a group called the Global Real Estate Sustainability Benchmark. 

GRESB, as it’s now known, was a relatively new organization that assessed the sustainability performance of real estate portfolios. Ellis recommended to his then-manager at CBRE that the company participate in the report with the idea it could help them prove to investors that they were committed to being “green.”

“We had all heard mentions of GRESB before,” Ellis says. “The concept of ‘green’ was becoming a hot-button topic in our industry. So my manager asked me how much the report would cost and I quoted him about $15,000 — pocket change when compared to the $6 billion portfolio CBRE was managing at the time. Without blinking, he told me to move forward with the report.” 

But impressing his boss and getting a green light wasn’t the best thing that came out of the exchange for Ellis — it was the advice his manager offered, which exposed an overlooked asymmetry in the market. 

“He said to me, ‘You have to understand that I can pay you $15,000 and check this box, or I can decide not to and risk a billion dollars,’” Ellis recalls. “I never forgot that.”

That was the moment Ellis realized the glaring mismatch between the value proposition of what he perceived to be the solution — the GRESB report — and the investor’s perception of the fear of not reporting. Whether anyone decided to invest or not could depend on the results of that single report. Ellis knew the commercial real estate world was heading towards an era that would revolve around data and transparency — and with that simple realization, he knew he wanted to be a part of it. 

A winding road toward effective change

While “green” may have been the latest buzzword around the time Ellis made that pitch to his manager at CBRE, the idea of sustainable building wasn’t anything new — in fact, it had been around for thousands of years. The foundations of so-called “green building” were always, and still are, based on using renewable and environmentally-friendly resources to build structures that will limit or eliminate a building’s impact on the environment. 

The oil crisis of the 1970s brought the concepts behind sustainable building back to the fore, though it would be decades before we’d give it a catchy name. With oil prices on the rise, builders began to look for alternative energy sources and ways to gain efficiencies in their building practices. And at the same time, a broader environmental movement was taking shape, further encouraging greener building practices and greater consideration of the environment. 

In the 1990s and early 2000s, the concept of green building finally started to enter the mainstream. Governments formed committees and launched programs designed to measure how “green” a given building was. 

“The problem with that line of thinking,” Ellis says, “is that green is just a color. “It didn’t mean much, and it wasn’t defined well in terms of environmental impact.” 

Though the foundations of the green movement were well-intentioned, they never managed to take root. It wasn’t until people began to realize that green buildings were better economic investments, we saw the market’s focus shift from green to the broader concept of sustainability.

The term “sustainability” referred to creating outcomes that balanced the well-being of the planet with those of builders, owners, and occupants. This included the sustainability of economic returns, social and environmental impacts, and health and wellbeing. And though there weren’t many widely-accepted ways of measuring sustainability, investors began to notice better returns on their sustainable investments. Gradually, consensus built: Sustainability was beneficial to the environment and real estate investing. 

“In the mid- to late-2000s, this shift started to catch the attention of regulators, at which point sustainability shifted from a goal to a requirement,” says Ellis. “Now owners had to meet environmental targets.”

Next, with regulators setting benchmarks and owners and investors looking to set themselves apart, owners began wanting to show off when they met — or exceeded — targets. So began the rise of certification systems, badges, and evaluations that allowed owners to identify their buildings as “sustainable.” Not only did certifications allow owners to identify the buildings that met targets, they could also count them in their portfolios — and flaunt them by lining the walls of their offices with the badges and awards they collected. 

But even the new benchmarking system was no boon for the environment. While certifications may have demonstrated that a building was built sustainably, they didn’t necessarily prove that they would be operated that way. And, it quickly became obvious that even obtaining a green certification was prohibitively expensive for most real estate owners. Back then, Ellis says only a fraction of all new buildings were built to any sustainability standard, and most of those were massive, megaprojects in cosmopolitan cities that were built to attract high-paying tenants. Even today, the types of buildings that get built far more often and dominate most of the commercial real estate landscape — medical practices, grocery stores, strip malls, or gas stations. Without accounting for these smaller, more common building projects, certifications were never going to be an effective way to encourage sustainability for everyone. 

“The vast majority of real estate is private, and it’s mom and pop, and it’s one or two buildings, and it’s multifamily assets,” Ellis says. “So you had this elite separation of big, expensive, valuable buildings that were pursuing badges, but that was it. And the only real incentive at the time was the certification. So how much sustainable real estate was there, really?”

Still, the idea of sustainable building — certificate or not — was starting to catch on. By the time Ellis presented his manager with that GRESB report, businesses were hiring their first directors of sustainability and producing their first corporate sustainability reports. One lesson learned from the certification era was that most of a company’s overall footprint comes from its buildings.

To that end, many organizations — most of which are tenants rather than owners — began to pay more attention to the buildings and spaces they occupied. They started to have expectations of landlords and owners with respect to sustainable outcomes. Owners were now expected to provide their tenants with better services and more information about how they were measuring up. For the first time, just about every stakeholder — owners, regulators, investors, and occupants — wanted hard data and a better understanding of the impact of real estate on the environment. It was time for a change. 

Enter ESG

Though the idea of “sustainability” and the certifications around it helped lay the groundwork for the real estate industry’s commitment to reducing its impact on the planet, the future of the movement now belongs to a much larger group of real estate owners. Obtaining certifications is extremely costly, and, as Ellis says, being sustainable “shouldn’t be just for an elite few.” 

“That’s not how builders, real estate owners, or occupants will ever affect change and sustain the future,” he adds. “Unfortunately, without data and reporting for every building, the same problems that plagued the green and sustainability eras will return.”

This need for data has ushered in the ESG era. ESG (Environmental, Social, and Governance) refers to the data about a building’s impact on those three areas. The ESG era is one that doesn’t simply prioritize new buildings. And it serves investors, buyers, occupants, and regulators alike by connecting the dots between data, sustainable finance, and outcomes — for everyone in the real estate world. 

Ellis believes that hard data is truly what sets ESG apart from its predecessors—and it’s what gives companies the power to make real change with its policies and actions. In 2013 he founded Measurabl, an ESG data management solution to help commercial real estate companies measure, manage, and disclose their ESG performance.

“ESG is a very democratizing concept,” Ellis says. “It is essentially the idea that every building has environmental social impacts and they can be measured, and it doesn’t have to be hard and expensive—and you don’t need anyone’s opinion, except the opinion that matters, which is the buyer and the seller, and the occupant and the lender.”

The real estate world is facing its need to gather accurate data and communicate that data to stakeholders. ESG will serve to empower the players in the market to affect positive change for the environment and society—with some financial benefits, too. ESG tracking can flag potential environmental and social risks — or opportunities — that could eventually have an impact on a company’s profits and investment returns. For instance, if certain environmental events could potentially limit the long-term availability of a particular raw material, ESG-savvy businesses that rely on that material would be able to address the situation before it affects production. Conversely, ESG data could alert a company to the benefits of, say, opening a facility closer to a supplier. While the environmental benefit would be clear — a shorter distance for deliveries means fewer emissions — it could also allow the company to save on transportation costs.

ESG has the potential to be accessible and scalable, as long as data is within reach. Without the access to data and total transparency that ESG investors require, we’ll continue to run into the same problems we did with green, sustainability, and certifications. And without the values that ESG puts forth, real estate runs the risk of continuing to face greenwashing—the false representation of data in order to convey an organization, building, or portfolio as more environmentally friendly than it really is.

Instead of investing in certifications that can be costly, the ESG movement encourages real estate actors to redirect those funds toward projects that move the needle on their environmental and social impact. It takes the “green” designation out of the hands of a small set of arbiters and puts it into the hands of the market, which will lower costs, give clarity on which metrics actually make sense for your business, and improve the comparability of asset performance for all real estate actors. 

Every building has environmental and social impacts that can be measured, and doing so doesn’t have to be difficult and expensive. What’s more, you don’t need anyone’s opinion on what’s being measured other than that of the buyer, seller, occupant, and lender.

Ultimately, real estate markets exist between buyers, sellers, occupiers, and lessors. The responsibility lies in getting quality information to these players, providing them with context, and then letting them make the decisions.

ESG represents a move towards the idea that data is liberating, and no matter the company’s reason for gathering and disclosing ESG performance, it is necessary for business to progress. 

“We needed GRESB and green certifications 10 years ago because we needed a notion of what we were even talking about,” says Ellis. “We needed a common lexicon, and we have that now, so we can do this — for the betterment of our world and our investments.”

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