ESG and Real Estate: Benchmarking Regulation Trends
The Importance of ESG in Real Estate
Building operations and construction account for nearly 50% of global emissions. As the impacts of rising global emissions have become more evident, many real-estate players are now prioritizing reducing their emissions. Investors are making net-zero commitments, reporting standards are increasing, state and local governments are passing emission reduction laws, and tenants are demanding more sustainable buildings.
The physical consequences of climate change have grown as storms, floods, extreme heat, and other risks have accelerated rapidly, increasing the possibility of mispricing real estate and significant devaluations in real-estate portfolios. For example, banks are starting to consider climate risks when making mortgage decisions, a process called “underwaterwriting” or “blue-lining.”
Nonetheless, this presents an opportunity for new value creation. The smaller a building’s carbon footprint, the more competitive it is on the market. For instance, if a tenant is looking to reduce their Scope 3 emissions, they will want to lease out a building that is the most efficient - because that represents their Scope 3.
Net-Zero Buildings
In May of 2022, the World Economic Forum, in collaboration with JLL, published a Green Building Principles: Action Plan for Net-Zero Buildings for all sectors, applicable to both construction and retrofits. The action plan provides a net-zero roadmap for helping companies ensure they meet their commitments and make meaningful progress.
The plan also provides actionable strategies for all asset managers:
Get started by calculating the carbon footprint of your portfolio.
Measure and reduce embodied carbon where possible.
Optimize utility usage and increase renewable energy supply.
Work across supply chains to reduce emissions.
Tackle residual emissions with carbon offsetting.
Ensure equitable cost-benefit sharing with stakeholders throughout the process.
Energy & Water Benchmarking for Buildings
In the context of a building’s utility usage, benchmarking refers to the ongoing review of a building’s energy and water performance to ensure it uses utilities as anticipated, relative to peers over time.
As state and local governments have been signing onto climate commitments and setting reduction goals, building decarbonization is a vital step. Benchmarking a building’s energy and water usage is key to understanding building performance to reduce its footprint. Many state and local governments have implemented benchmarking and transparency policies that require public, commercial, and multifamily buildings to track and submit their utility data to the city or state. These policies have presented opportunities for building owners to catch billing errors, encourage efficiency, and create more transparency within the real estate community.
Benchmarking & Transparency Process
Report
Building owners report energy and water usage along with building characteristics
Compare
Energy Star Portfolio Manager provides performance metrics to building owners compared to similar buildings
Share
Performance metrics submitted to the city are made available so the market has information on building performance
U.S. Building Benchmarking and Transparency Policy Trends
Benchmarking and transparency ordinances are no longer novel policy initiatives. San Francisco was one of the first cities to get into the game of energy benchmarking and disclosure. In 2011, the “Existing Commercial Buildings Energy Performance Ordinance” was passed, requiring annual benchmarking, periodic energy audits, and transparency for non-residential buildings of 10,000 sq. feet and above. Fifty other cities across the U.S., from Seattle to Philadelphia, have passed benchmarking, transparency, and beyond policies.
Benchmarking is no longer a policy push only prevalent on the coasts but across the Midwest as well. Indianapolis was the 31st city to pass and implement this policy. (We will take a more in-depth look at the Indianapolis Benchmarking Program in the section below.) Statewide benchmarking policies have also passed in states including California, Washington, Colorado, Maryland, New Jersey, and Massachusetts. These benchmarking and transparency policies continue to gain momentum throughout the country, and will very likely ramp up and move beyond benchmarking and require buildings to set emission reduction goals.
(Source: www.imt.org/resources/map-u-s-building-benchmarking-policies/)
Example Benchmarking Policy
Goal: Indianapolis to Reach Carbon Neutrality by 2050
In 2017, Indianapolis Mayor, Joe Hogsett, signed Special Resolution 10-2017, committing the City of Indianapolis and Marion County to achieve net-zero emissions by 2050. In 2021, the City strengthened its climate commitments by setting a science-based target, aiming to reduce more than half of the City's 2018 per capita emissions by 2030. More than half of these emissions come from the operation and construction of buildings.
Indianapolis Benchmarking and Transparency Ordinance
In order to take action on emission reduction and reach carbon neutrality by 2050, the Indianapolis Office of Sustainability developed a local Benchmarking and Transparency Ordinance passed by the Indianapolis City-County Council in July of 2021. The Indianapolis Benchmarking Program, referred to as Thriving Buildings, gives organizations the opportunity to benchmark their energy and water data to identify ways to save money on utility costs while improving air quality for Indianapolis residents.
Indianapolis Ordinance Compliance Timeline
2022 marked the inaugural program year where building owners could voluntarily submit their data using the EPA's ENERGY STAR Portfolio Manager, and an astounding 200+ buildings participated. Following the initial voluntary submission period, the Indianapolis Benchmarking Program has three vital upcoming milestones for the program’s rollout:
June 1, 2023: Commercial and multifamily buildings of 100,000 sq. ft or larger in Marion County must submit their energy and water data to the City by June 1, 2023.
June 1, 2024: Starting in 2024, the building size reporting threshold will drop down to 50,000 sq. ft and larger that must submit their data to the City.
2026: Building characteristics, including energy and water scores, will be published and available to the public.
Compliance Steps for Indianapolis Benchmarking Ordinance:
Here are steps that building owners can take to comply with the Indianapolis Thriving Buildings Program:
Find your Unique Building ID using this spreadsheet. If you cannot find your building's address, please email Benchmarking@Indy.Gov.
Create a free ENERGY STAR Portfolio Manager Account.
Set up properties and add your UBID.
Set up meters and add one year’s worth of energy and water data.
Report your benchmarking data to the City.
Learn more about the Indianapolis Thriving Buildings Program.
If you want to ensure your building is in compliance and start benchmarking today, KERAMIDA can help. Our Sustainability & ESG Consulting services assist organizations in utility benchmarking. If you are interested in how we can help you succeed, please contact us or call today at (800) 508-8034 to speak with one of our sustainability consultants.
Author
Amber Greaney, MPA, LEED GA
Senior Sustainability Manager
KERAMIDA Inc.
Contact Amber at agreaney@keramida.com