Each year I publish a public, forward-looking letter on how I expect real estate markets to evolve in the coming 12 months with respect to ESG and lay out how Measurabl will change along with them. My goal is to continue our multi-year campaign of business transparency and stakeholder engagement so real estate professionals know how Measurabl intends to support them in the transformation to sustainable real estate and can provide direct input on our work.
Before we can look forward, it’s important to examine where we currently stand. The real estate industry is at the precipice of a fully regulated ESG reality. This is a seismic shift from the investor-led era that’s dominated our last decade. Instead of voluntary regimes of disclosure and relatively light-touch investor inquiries into ESG practices, public and private real estate companies will feel the hand of legal enforcement of carbon reduction mandates and disclosure requirements.
The resulting investment and workflow changes will force a shift in how the business of real estate fundamentally works at every level, from leasing to buy-sell to bond issuance. In particular, the threat of legal and financial penalties will compel three things from the industry: (1) an obsession with quality data, (2) a new level of transparency around ESG performance, and (3) a defined path toward decarbonization.
The real estate industry is at the precipice of a fully regulated ESG reality. This is a seismic shift from our prior, investor-led decade.
The first shift represents a necessary hedge against inevitable legal repercussions stemming from issuing incorrect ESG claims. Previously, these risks carried no or light repercussions like temporary damage to personal or corporate brands. Now the consequences of inaccurate disclosure will result in material financial penalties and pain of lawsuits felt across entire organizations. DWS is one of several early examples of this shift.
What’s the definition of “quality” data? Quality data is transactable. The litmus test is whether a particular ESG metric in question, say carbon intensity per square foot, is usable by a real estate professional to underwrite a loan or a buy/sell transaction. This is our reality in 2022.
What’s the definition of “quality” ESG data? It’s transactable.
The second implication of regulation will manifest in a changed relationship between LPs, GPs, and lenders, as well as between governments and property owners. These relationships will become more visceral and direct. As opposed to understanding ESG performance from a distance through subjective ESG proxies like building certifications and voluntary reporting regimes, we will instead rely on government-issued performance certificates of carbon compliance and legally defined performance metrics. Look no further than SFDR to see as much. In many ways, this is a return to business as usual—traditional real estate value metrics like cap rates have always driven real estate transactions, not their proxies. So shall it be with ESG value metrics in 2022.
The second implication of regulation will manifest in a more visceral, direct relationship between LPs, GPs, and lenders, as well as governments and property owners.
The transition from information to action is the final implication of a more regulated world. Real estate is, after all, one of the most regulated industries on the planet. Try punching a new door into a wall without having the fire inspector come by to approve…
It is therefore no surprise that regulators, whose agenda includes lower national carbon footprints, will intervene in financial markets to define and enforce ESG transparency. Regulators will also promulgate incentives that direct labor to green projects, a large chunk of which will occur inside or on top of buildings. These “actions” make sense when you consider that real estate is the world’s largest asset class and one of its most environmentally and socially impactful: buildings account for 39% of carbon emissions and 30% of raw material use. 90% of our time spent is indoors. Since the largest impacts are in the built environment, so will be the rules. Rules compel action.
Let me turn to what Measurabl will do about this transition to a regulated reality. The first thing I’d like to highlight is our effort to serve multiple stakeholders along the real estate value chain. Measurabl historically focused its effort on direct real estate owners. In 2020, we set about expanding that to include indirect participants in real estate such as LPs, lenders, and insurers. Two years of hard work have yielded not just new software tools, which include functionality for LPs, but also a new slate of authentic data products designed to reduce the friction of accessing transactable ESG data. Our goal with these products is to return real estate professionals to data-driven decision making and bring them back together around shared metrics. Early and enthusiastic adoption of these tools indicates to me we are on the right path. Your feedback one way or the other is most welcome.
Two years of hard work have yielded not just new software tools, such as functionality for LPs, but also a new slate of authentic data products designed to reduce the friction of accessing transactable ESG data.
The other major new effort we’ll undertake in 2022 aside from the launch of our new data offering is market consolidation via M&A. Measurabl has always declared meter to market as the scope of its product ambition. At the same time, the set of tools required to do this is vast. Some of the most important capabilities, like tools for asset-level decarbonization, are well addressed by longtime friends in the market. By acquiring and integrating these tools into the Measurabl platform, we aim to rapidly unify the real estate industry from meter to market and reduce confusion and redundancy. I look forward to sharing the news of our first major acquisition soon and I appreciate the help of our customers, partners, and investors who continue to help us identify the best tools and companies to work with globally. Please keep your recommendations coming.
To summarize, the era of regulation is upon us. Its implications are quality, transparency, and action around ESG. Measurabl’s specific answers in 2022 include transactable ESG Data as a Service and swift unification of the ESG value chain from meter to market. Taken together we believe these efforts will make 2022 another positive year for us, our customers and their stakeholders who will be able to not only more readily collect and disclose ESG information but get back to doing what they do best: transact.
Matt Ellis, Founder & CEO, Measurabl